Oil industry lobbyists must have been working the government over for months. The price of oil has plunged nearly 60% since June. Smaller oil companies are going bankrupt. Larger ones are bleeding. Energy junk-bondholders are getting massacred. Wall Street investment banks are fretting about losing the fees. Lenders are worried about their energy loans. PE firms that have funded the fracking boom are taking big losses. Venezuela is falling apart and is going to default. Russia is careening in the wrong direction. Kern County, the oil capital of California, declared a “fiscal emergency.”
They all need the price of oil to jump, and they need it to jump NOW.
And besides, American consumers, who’ve benefited from the lower price of gasoline, don’t seem to appreciate it, at least not in the true American way, as the last retail-sales reports have shown. They aren’t spending the money they’ve saved on gas. They’re supposed to spend all of it, and more than all of it in the true American spirit of living beyond your means. But instead, they’re squirreling it away to pay for surgery or college or whatever. Retail spending has been dropping. And that can’t be allowed to happen.
So on Friday evening, when consumers were busy with other things and weren’t supposed to pay attention, the government proposed to yank that little monthly bonus away from them and hand it to the fracking and off-shore drilling industry, the big oil companies, the little oil companies, their suppliers, to the PE firms that invested so heavily in fracking, to the Saudis, Russia, to the despised government of Venezuela….
Conspiracy theory?
Not quite. The Energy Department announced it Friday evening when no one was supposed to pay attention. It proposed to buy 5 million barrels of sweet crude for the Strategic Petroleum Reserve, Reuters reported. It could accommodate some oil in May but most of it would be for delivery in June and July.
How much is 5 million barrels? On first sight, not much, given the size of the oil markets. It represents over half a day of US production. But US crude oil inventories in the latest reporting week rose by 4.5 million barrels. Only about 70 million barrels in working storage capacity remain available. When storage is full, all sorts of heck is going to break lose. And storage is filling up quickly. The markets have been fretting about that.
These 5 million barrels would make a dent into such fears. It’s not huge, but it’s at the margins were prices are set.
The excuse this time is that the government is required by law to replace the 5 million barrels it took out of the SPR in March 2014. Back then, the excuse for taking out the oil was that it would be a “test.” Everyone figured at the time that the government wanted to bring down the price of oil to punish Russia and send a stern message about its actions in the Ukraine.
Could the government be motivated by “Buy low, sell high?” No. The US government doesn’t know what profit is. It has no profit motive. The number one unwritten rule that employees of the government learn as they move up the ladder: “No one has ever been promoted for saving the government money.” The opposite is the case.
The current proposal contradicts recent discussions about reducing the SPR. Given the booming oil production in the US, and the imports from reliable neighbors Canada and Mexico, relatively little oil is being imported from other countries. The SPR simply isn’t that necessary anymore. The Obama administration is already working on a plan to reduce the size of the SPR and is expected to include details in its next energy review.
But no. Apparently, the oil industry will have none of it. Instead, the government is going to do what we’d been suspecting it might eventually do: bail out the oil industry.
The government plowed part of the proceeds from the sale of those 5 million barrels in March 2014 into a gasoline reserve in the Northeast “to address some of the resiliency needs in the region made evident by Superstorm Sandy in 2012,” a DOE spokeswoman said, according to Reuters. The remaining money is going to be used to buy back that oil.
And in the air hangs the threat that the government can always buy more if the 5 million barrels fail to pump up the price of oil, and along with it the price of gasoline.
We assume that President Obama will soon explain in one of his noble speeches why the oil industry, speculators in the energy sector, energy junk-bondholders, Wall Street investment banks, regional banks, the Saudis, Russia, Venezuela, and all the others – why the heck they need to be bailed out by strung-out, underpaid, overtaxed, maxed-out American consumers.
The industry is desperate. The price of oil did today what it has been doing for a while: it waits for a trigger and plunges: West Texas Intermediate dropped 4.4%, going into the weekend at $45 a barrel, less than a measly buck away from this oil bust’s January low. It’s down over 20% from the peak of the most recent sucker rally. US oil drillers have been responding by slashing capital expenditures, including drilling, in a deceptively brutal manner. Read… The US Oil Bust Just Got Worse
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
If I were a government spokesman trying to spin this I’d just say we thought it was a good opportunity to top off the tank at these prices. Then everyone would be preoccupied arguing over whether or not the government picked the bottom or should have waited.
Some weeks ago here I posted that I was going to stick my neck on the line and predicted by using straight forward math that the price would bottom at around $19.60 in late April early May and climb to about $23 by year end.
Well I ran the numbers again, and guess what, even with the 20 % dead cat bounce we just had, it is almost exactly the same prediction.
Anyone who has ideas that the current global depression is going to be slow and mild and that somehow the US can weather the sh*tstorm heading this way with sub $25 average oil for 2015 is living in a dreamworld.
And even that level will have zero visible impact on worldwide demand, and obummer can print another 4 trillion to waste on propping it up but it will all be wasted in time
5 million barrels of sweet crude for the Strategic Petroleum Reserve is less than insignificant because US reported production is increasing at about 2.5 million barrels (MBD) per day each week. For the week ending 2/27 it was 9.32 MBD on 3/12 it was almost 9.37 MBD. In just the last 2 weeks the industry’s average production increase every 2 days has offset this insignificant purchase.
The only value of this purchase is for propaganda/PR purposes. But maybe it won’t even have that value.
Bad math on my part.. 5 MBD is slightly more than half a day of US production.
US should just end the economic distortion of ethanol corn subsidy and imperialistic demand that we put food (ethanol derived from food, which dominates US ethanol production) in our gas tanks. Lowers taxes. Increases oil consumption. Lowers food prices. win-win-win.
Stuff Archer Daniels Midland and their advocates to correct bad, costly policy totally out of date with the reality of today.
Canucanoe1,
might be the right thing to do,it all depends.
It all depends on who Washington is really working for,……know what I mean?
Nice token, nothing more. If the govt wanted this fixed, they’d have done so months ago, or better yet, it would’ve never happened in the first place. This will surely produce a bump in the price as speculators go wild over “QE Oil,” but ultimately, even if the govt wanted to buy the oil, where would they store it?
People say they should burn it, can you imagine the optics of burning millions of barrels of oil, that taxes paid for? Not gonna happen. The energy industry got its gift, with no further commitment, which shows the govt wants this oil bust to happen.
Just scoured the headlines about this, and am convinced its a non-event. Reason it was announced friday was to minimize it’s impact on the markets, note that all Saudi statements were timed to produce maximum impact, most occurred just before European markets open.
Also, few big media picked this up, and those carrying it framed it as, “Energy department to buy up to 5 million barrels of oil, take advantage of low prices.”
Not a word about propping up the industry or oil price, just a “shrewd buy” when oil is cheap.
I bet it has no effect, or even a bearish effect, as this was floated a while back, so surely some speculators betting on full govt support
Relax. It’s just part of the five year plan.
The SOR has already bought over 10 mm barrels since the end of January.
Why do you think the price has gone up over the last 4-5 weeks?
If the SOR keeps buying then the reserve will be at it’s maximum sometime in July/2015.
All other storage in the US will also be full at about the same time.
Watch for the price to really drop later this summer.
I thought that the government was hitting a debt ceiling and was then going to run out of money to spend again…
The country is a farce. Shakespeare would have had a great time writing plays about all this. Insider trading, HFTing, Citizens United, TBTF, Chris Christi and Hillary and on and on and on… all in the land of the once free and the home of the bizarre propaganda and twisted figures.
I find myself freer than I have been in my life..I am 72 years old….I also find my self not to be over-taxed even as a 1%’er of long standng….The American consumer is not over-taxed; he is underpaid on his /her job…
Don’t panic Mr. Richter. The global economy is in meltdown, this is minor news.
I read a stat the other day that noted the total global equity market in 1983 was worth about 4 trillion dollars. Today it is 60 trillion. Things will certainly end badly.
60% of all global commodities on average are purchased by China. A country that may very well collapse. Ever read anything about Chinese property rights? Guess what, they’re a mess and may foment revolution. I see China as the major player behind the gold and silver spike.
I expect to see gold collapse and follow oil down. A handy stat is that one ounce of gold is on average worth 16 barrels of oil.
http://fintrend.com/charts/gold-vs-oil-chart/
Unless you follow the market random walk hypothesis in which case you should ignore everything and pray to Zeus.
Iran nuke talks fail.
Israel bombs Iranian nuke facilities and attacks Hezbollah in Lebanon.
Iran goes apeshit and attacks Straits of Hormuz shipping and Israel.
Oil price spikes big time.
Economies collapse around the world.
US produces 50% of their own oil + buys more Canadian to limp along.
MEC insiders make even more money killing brown people.
Drill Baby Drill prayed for by everyone.
There, problem fixed. (“Until next time, take me to Wall Street, Jeeves”)
I follow the oil market on a daily basis and sometimes make related investments. I don’t feel this is big deal or a dark conspiracy. Since everyone else likes to make guesses/predictions I’ll say between 30 and 40 is the upcoming bottom. Hearing about 20 but that just doesn’t seem realistic.
Oil and gas production do not start or stop on a dime.
There is a lot of energy sector production momentum based on $100/bbl (funny how quickly producers get used to the high price, huh?) that has to work itself out of existence.
$35/bbl.
The January low will hold.
Sooner or later, we’re all going to be wrong forecasting where the price of oil is headed. This is what real busts teach us every time.
WHY, LETS START EXPORTING OIL. 40 YEARS IS ENOUGH
Exporting oil won’t solve anything…but it will exacerbate an already surplus crude glut…Congress banned crude oil exports in 1975 in response to the Arab oil embargo which sent the price of oil soaring in 1973. The purpose of the ban was to ensure there was enough energy available for American consumers. While crude oil cannot be exported, there are currently no restrictions on the export of gasoline, diesel or jet fuel; therefore, oil products that are produced in the U.S. are already leaving the country. The US is already a net producer of refined oil products…The problem is that the world demand is also down for gasoline, diesel and jet fuel and other refined products
I believe it is Parkinson’s 2nd Law that states “Expenditures rise to meet income. Unless you’re a government, then expenditures rise to exceed income.”
It’s party in the bunker time, gang. NOBODY can predict anything since we’re outside past experience. Keep your powder dry. The public has stopped borrowing paying down debt. The squirrels in DC keep pressing the bar for the food pellet but the experimenter has finished his study on intermittent reinforcement and left the building.