U.S. Strategic Petroleum Reserves: The New Monetary Tool?
Commodities / Crude Oil Sep 05, 2012 - 02:06 AM GMTBy: EconMatters
Oil and commodities are rising with renewed talk of buying bonds in Europe and future stimulus from the Federal Reserve in the United States. The problem of course is that higher oil prices partially offsets some of the benefits of these Monetary Initiatives by leaders (It is debatable how effective these policies actually are in solving the real issues and problems).
One of Europe`s biggest problems is lack of actual growth in the Euro zone, and this means that they really cannot grow their way out of their vast debt troubles. It sure cannot help that much of Europe is paying $12 a gallon for gas. No wonder their economies are in trouble.
The way European economies are set up with regard to slow growth, mature countries with little innovation, high taxes, and even higher government spending commitments means the numbers just don`t add up. Europe could start from scratch with all debt forgiven and they would be right back where they are now in less than 10 years because the numbers just don`t add up. Until the numbers start to make sense all these monetary initiatives are just temporary stop gaps which actually make the numbers problem worse.
But since everything seems to be managed these days, and all markets are correlated globally with electronic trading and sophisticated trading algos, central governments might as well be in charge of the actual commodities they are juicing. Because in effect their policies are managing these commodities prices, from corn to gold, from gasoline futures to silver prices as it is all the same trade in the market`s perspective.
So why not let these central governments manage the outright commodities just like OPEC? ECB starts bond buying program, dumps a bunch of oil on the market to offset the negative side effects of their programs. The Fed starts QE3, dumps a bunch of Oil on the market at the same time so Oil prices don`t rise with the stock market on QE3.
Do these SPR releases work? Heck yeah, just ask all those traders who lost money last year when WTI went from $115 a barrel to $94 in 24 hours on the rumor behind the scenes that the SPR releases were being coordinated (this is long before the actual news when the price dropped about $7 dollars a barrel).
By the time the SPR releases were actually announced all the big players had already priced this event into the markets. The real damage came before the actual announcement as like most things on Wall Street inside information runs rampant when so much money is involved.
Can you imagine how valuable that information was that got leaked to the big players that there was going to be a large coordinated release of the SPR`s? Now you are not naive enough to think that the magical $20 drop in Oil prices over that 2 day period was just natural markets at work do you? So yes, SPR releases do in fact work!
Oil markets like most commodities are momentum based, and besides the immediate additional supply on the market and the drop in futures prices as longs get screwed and have to dump positions is the psychological factor that at any time the Government can come in and “manage” the market. It is hard to get too much momentum going under those circumstances. In effect, sort of like OPEC manipulates….I mean “manages” prices.
Why not set a target and then trader`s will know exactly where they can push the price of oil before getting out? Is it any different than the Swiss targeting a level in their currency or China for that matter? If the ECB is going to target an interest rate for Spanish Bond Yields on the 10-Year, why not set actual targets for Oil as well?
For example, target WTI at no higher than $90 or $95 a barrel and Brent at $105 to $110, and then Central Governments wouldn`t even actually have to release any Oil as they could just set the targets and markets would do the work for them assuming no actual supply shortages in the market. Which by the way has actually been the case for the last 5 years based upon conservative analysis of the EIA data, i.e., there has been no supply shortages despite the price fluctuations with all oil inventories well above average supply levels during this period.
Really, since Finance ministers are in effect “Managing “ oil prices as a byproduct of their actions anyway just give them one more tool for their policy initiatives in letting them manage the releases of the SPR`s as well.
By EconMatters
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