|Strategic Petroleum Reserve politics give new meaning to the Keynesian market wisdom that sometimes the pump needs to be primed.|
NEW YORK ( TheStreet) -- In a week that saw the national average price for gasoline hit $3.83, Federal Reserve chairman Ben Bernanke acknowledge oil inflation, and Congress shoot down amendments to a major transportation bill that would have sought a boost to alternative energy and natural gas transportation, loose-lipped British politicians were the ones that set the tone for the oil market. A Reuters report mid-week quoting anonymous British sources as saying the country had reached with the United States to tap strategic petroleum reserves was followed by a swift White House denial that such an agreement existed. Let's assume it exists ( Reuters has only added to rather than recanted its report since). Let's say it's only a matter of timing and it's all about politics. That's what the market seems to think.
In fact, it's easy to imagine how both the anonymous sources and White House spokesman were telling a different version of the same truth as British Prime Minister David Cameron took in some NCAA basketball tournament action with President Obama. As basketballs took flight in tip-offs at arenas all over the U.S., an important political decision during a crucial election season may have been preceded by floating a trial balloon. The British may have leaked the news to the press to see how the market would react, while the White House gets to keep the oil speculators on their toes by turning around and denying it. "The decision has probably been made if it was discussed," said Summit Energy analyst Matt Smith. "They are paving the way for the release." Beyond the political back and forth, there's the reality of the oil market. This is the important arbiter, and many of the data points don't support a tapping of the U.S Strategic Petroleum Reserve (SPR). U.S. gasoline demand is down 7.2% from last year. Total demand for crude-oil based products is down 5%. Meanwhile, crude stockpiles have reached a six-month high. In terms of global oil market fundamentals, Syrian and Sudanese supply declines are not immaterial to the market tightening, and Saudi production is running at a 30-year high. Add in the geopolitical tension with Iran and elevated oil prices can be justified. It's no longer just about the oil market speculators who President Obama called out last year.
Any release from the SPR wouldn't be much of a drag on prices, either, with WTI crude already trading near a $20 discount to Brent crude and the supply at the U.S. Cushing oil hub already 30% higher than it was in January. The Cushing supply is up to 38.7 million barrels after falling to as low as 28 million in January, which was the lowest level since late 2009. Increasing supply from Canadian oil sands and from the shale drilling boom has put the price at the pump out of whack with domestic supply dynamics. President Obama has referred to his administration as overseeing the largest increase in domestic oil in recent history. Last year, the U.S. became a net oil exporter for the first time since 1949. Yet the national average price for gasoline hit $3.83 per gallon in March. For perspective, the 2008 high point for gasoline before the financial crash, $4.11 per gallon, wasn't hit until when it should have been hit: The summer driving season. The political reasons for tapping the SPR are clear though, even if it could have the perverse impact down the road of forcing the U.S. to buy replacement oil at an even higher price than today's level. What it accomplishes in the short-term, too, will be more political and psychological than anything else. Whether it is a sudden release or a gradual dribble from the strategic global oil spigot, the temporary appeasement of the oil price relies more on the coordinated action of European nations to release supplies, too, as Brent crude is the gas price base, not WTI, and this requires the involvement of dozens of countries currently involved in the Iranian sanction game of chicken. Last year, when the Strategic Petroleum Reserve and European reserves were tapped for a total of 60 million barrels, it amounted to less than one day of global oil supply, though it was gradually released over a period of months. The impact of last year's decision is difficult to assess, as it coincided with the summer's U.S. debt ceiling debate, the August U.S. debt downgrade and a general weakening in the markets which in the least obscured the impact of the oil market "priming of the pump."
This time around, there is even more reason to believe that the strategic petroleum move can only have a temporary impact. The markets are much stronger and the geopolitical situation even more dicey. Last December, oil was in the mid-$90s. Today's situation is more about the geopolitical risk premium than any other single factor. "A resolution to the Iranian situation will have a far larger impact on the price of oil than the strategic petroleum reserve," Smith said. There are only two solutions to a world of rising oil prices. In the near-term, resolution with Iran over the current crisis and European sanctions, and over the long-term, energy policy that makes the Strategic Petroleum Reserve an actual strategic reserve as opposed to a political tool. -- Written by Eric Rosenbaum in New York. >To contact the writer of this article, click here: Eric Rosenbaum. >To follow the writer on Twitter, go to Eric Rosenbaum. Follow TheStreet on Twitter and become a fan on Facebook.