Crude Oil Manipulators
Research for Online Investors

by John Dalt

6/29/11

Last Thursday morning, before the market opened, the International Energy Agency (IEA) announced the coordinated release of 60 million barrels from strategic petroleum reserves held by oil consuming countries.  The U.S. contributed 30 million barrels of this additional supply.  The release was to take 30 days.

This was to be the third time crude oil had been released from the U.S. SPR, and the largest.  The SPR was tapped previously during the first Gulf War to remove Iraq from Kuwait and again after Hurricane Katrina when super-tanker off load facilities were damaged.

West Texas Intermediate (WTI) Crude oil closed at $95.41 on the day before the announcement.  Today WTI traded back to $95.02  The USO (Oil etf) closed at $37.08 on 6/22 and has traded as high as $37.60 today.  The President and other “market manipulators” bought four market days of “cheap oil.”

The real stupidity of the move was that crude oil had been going down in price since the beginning of May.  The only real rally we have seen since April is since the geniuses at the IEA and White House tried to intervene in the free market.

According to Forbes, sixty million barrels represents about 16 hours of global crude oil use.  Their article argues the SPR should be liquidated and abandoned.  Theirs is a free market argument; that even in times of war or supply disruptions, oil is always available at the “market price.”

We are sympathetic to the Free Market argument, but prefer to have extra canned food in the basement in case a storm or natural disaster causes the market price of food to spike in price. The shortage and ensuing price spike may only be temporary, until transportation can be restored.  But, why not be a good boy scout?

Our point today is the futility of the IEA and Obama’s attempt to manipulate the crude oil market with the blunt force of 60 million barrels.  Why did they do it?  The stated reason was to replace the 1.6 million barrels of ‘sweet’ crude that was off the market from Libya. Exports from that country had dwindled because of the clash between rebels and Qaddafi’s government forces.  Libya’s crude oil went to Italy’s refineries to supply Europe.  Italy’s refineries were not able to refine heavier crude oil, like Saudi Arabia’s.  Replacing Libya’s sweet crude with SPR crude (heavier and sour) did not make much sense.

Some speculated that the action was taken to punish commodity speculators. That doesn’t make sense as many had left the trade, or were short crude oil as the trend was down for the last 45 days.  If anything, short speculators made a killing on the fall in price.

Maybe the administration wanted to send a message of displeasure to OPEC, since they didn’t increase production at their last meeting.  That meeting had broken up acrimoniously, with Saudi Arabia vowing to increase production regardless of inaction by the cartel.

The end result, the world’s Strategic Petroleum Reserves will be 60 million less than they were.  Crude oil prices are as high as they were a week ago.  If we want to replace the crude oil taken out of the SPR, our government will have to compete with refineries and other users for tighter supplies in the future.  Obama releasing crude oil out of the SPR may be one of the most bullish signals the oil market could ask for!

The market is up again today.  I can’t get too excited.  This little voice keeps telling me to be cautious.  I hope you will be also.

The mailbag:
Wasn't the 'cut, cap and balance' strategy the mantra of Gingrich and the republican congress in 1994? And didn't that lead to a budget surplus by 2000? However, if I remember correctly, taxes were raised to balance the national budget…if memory serves correctly, didn't Bush and the republican congress absolutely destroy any semblance of fiscal responsibility in the ensuing 8 year period.... the period that got the US into the mess it currently finds itself. And wasn't that fiscal morass precluded by massive tax cuts (and 2 unfunded wars)?  Everyone's memory seems to be so short these days.---subscriber R.T.

John: I don't remember the use of the term "Cut Cap and Balance" by Gingrich in 1994, I am not surprised if he did use it because he is good at coining simple phrases that capture the essence of an important concept.  I believe you are correct there was an adjustment in tax brackets in the '90's  I also remember Clinton declaring "The Era of big government is over" and agreeing to cutting entitlements in the ‘90’s.  I am not sure I would agree to your inference that tax bracket adjustments lead to increased collections.  Collections go up based on economic activity...as GDP increases, profits and incomes increase, more taxes are paid.

You are correct that Bush inherited a recession from Clinton leading into the dot com bubble bursting.  Republicans did cut taxes to stimulate the economy, ie. increase production to restart GDP increases which lead to higher tax collections.  Tax receipts went up while George Bush was President.  What is the concern in your argument?

Do you think somehow low income people are cheated because others make money?  When almost half the population doesn't even pay income taxes, how much more do you want?  Many get "earned income taxes" which is nothing more than "manna from Uncle Sugar" added into their paychecks if they work.  You are correct that our country was attacked on 9/11/01 and Bush got approval from congress for military action in Afghanistan and Iraq.  Congress also approved the funds for these wars, they were not "unfunded"

I would point out the difference Obama seems to apply to Libya.  He sent congressional leaders a note over the weekend on his way out of town as military action started.  Who approved funding for Libya?  Who attacked us from that country?  Did they use nerve gas on their own people or their enemy in a previous war?  Maybe my memory is fuzzy.

One cannot forget that the Democrats were in charge of the House of Representatives for the last two years of George Bush's Presidency and the Senate since 2006.  Did they cut spending?  Maybe I have forgotten the austerity plan Nancy Pelosi championed.  Thanks for writing, but we have to have more than just the democratic talking points.  Harry Reid attacked George Bush daily.  The President never responded because he thought it diminished the office.

You might want to check, but I think Bush's largest annual deficit was $350 billion and it was going down (even while paying for the two wars) until the credit crisis hit in his last year.  I am sure you are aware the TARP funds have mostly been recovered, as banks paid the government back.  TARP was passed under George Bush and ballooned his last budget.

When the TARP funds were paid back under Obama, they should have reduced the deficit.  But, alas the money was spent on democratic dreams.

Obama's budget deficit this year is $1.6 trillion, what is that... 4.5 times bigger than Bush's largest deficit (except for 2008)?  Where is all of that money going?  Your president and party have been in charge since the credit crisis, what have they done to restore "any semblance of fiscal responsibility" to use your words?

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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