Frustrated with stubbornly high retail gasoline prices, President Barack Obama announced 60 million barrels of crude supply will be made available through a coordinated release of strategic reserve supply in the United States and Europe. The US contribution is set at 30 million barrels. With daily worldwide crude consumption at 83 million barrels, will this release of additional crude supply affect crude spot or futures pricing?
The immediate knee jerk reaction of the market to this announcement was to sell, pressuring the market down from $94 to $89. At the close of floor trading Friday, crude was back up to $95. Has the market shrugged the increase supply? Yes. However, traders need to be cautious discounting government intervention in the energy markets.
Government interventions in markets be it in currency or energy are normally futile efforts. Short term markets will react to the intervention, but longer term fundamentals eventually return. In and of itself the 60 million barrels of additional crude is a small amount. 23 million less than daily consumption. It was the surpise factor that caused the sell off. The buyers returned when better than expected economic data was released later in the week.
It is doubtful Mr. Obama will go away quietly should crude rise above $100. Expect for more intraventions with more strategic reserve crude gallons released until Libya crude production comes back online. Longer term demand for petroleum products will eventually drive the market. In the short term, longs need to be aware that a club is over their head ready to beat down upward price movements.
