That sound you just heard was the energy market collectively shrugging off the international effort aimed at preventing crude oil prices from overheating and derailing the global recovery.
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In the face of last months controversial decision to release 30 million barrels from the U.S.s emergency stockpile of crude, energy prices have quickly bounced back and are expected by many to continue to rise.
Some believe the speedy rebound signals at least a short-term failure to control prices and perhaps a longer-term diminished ability to take pressure out of the all-important oil markets.
At this point, the initial reaction is that the announcement has failed, said Stephen Schork, editor of the Schork Report.
A 'State-Sponsored' Squeeze?
On June 23, the day the U.S. unveiled plans to release 30 million barrels from the Strategic Petroleum Reserve, crude plummeted $4.39 a barrel, or 4.60% -- the biggest one-day selloff since mid-May. The tumble left crude, which had already been losing serious ground, at its lowest level since February 18.
That wasnt a change in sentiment, said Schork. This was a state-sponsored margin squeeze.
Indeed, crude took just five days to bounce back from that selloff and continued to head northward. On Tuesday, crude jumped another $2.28, or 2.4%, to $97.43 -- leaving it $2.02 above the SPR release level.
Likewise, the national average price of gasoline tumbled from $3.6258 a gallon on June 22 the day before the SPR release to as low as $3.5412 on June 30, according to the Oil Price Information Service. However, gas prices quickly bounced back, increasing 11 of the 12 days so far in July and climbing to $3.6361 a gallon on Tuesday.
A chorus of investment banks has issued bullish notes in recent days forecasting higher prices. Citing low spare production capacity, JPMorgan expects crude to hit $98 by year-end, up from $93 previously, and now sees 2012 prices at $114, up from $110.
The upside price risks to 2012 have materially increased, JPMorgan analysts wrote in the report, which listed the upcoming hurricane season and peak refinery runs as additional worries. This [SPR] release was a seminal moment -- not because of the use of emergency stocks, but because it underscored what we have suspected for some time -- there is no supply cushion to fall back on.
To be sure, barrels of oil from the SPR release havent actually hit the market yet. Its also worth noting oil prices had already plunged roughly 20% from their highs by the time the stockpile release was announced so a lasting negative impact may have been tough to come by anyway.
The government is such a severe lagging indicator, regardless of what party is in power, its just not capable of a pro-active anticipatory response. It can only react, said Walter Zimmerman, senior vice president of United-ICAP.
That lagging impact was compounded by the fact the June 23 announcement was part of an international collaboration led by the Paris-based International Energy Agency.
Short-Term vs. Long-Term Impact
Given the fact that oil had already pulled back, some see politics at play in the timing of the SPR decision. They suggest the White House was worried about sinking poll numbers that may be tied at least in part to the rising price of gas.
This is purely a politically-motivated move and the market is seeing right through it, said Schork. This is why prices have bounced back so ferociously in such a short amount time.
However, others believe it is short-sighted to grade the SPR release on merely the short-term impact on crude oil prices.
Tom Kloza, chief oil analyst at OPIS, said he believes the emergency action was geared towards keeping prices under control this winter and spring, not the summer.
Its about next year and putting the fear of God into the money management community, said Kloza, alluding to the role of speculators in the oil markets. He said policy makers hope the threat of future SPR releases will cause bullish speculators to say, If they sell 50 million barrels out of the SPR, it could blow my strategy to smithereens.
While the role of the investment community is important, Americans are feeling the pain at the pump now. And high oil prices could put further pressure on corporate America and give businesses another reason to hold off on hiring.
We dont have to wait for the winter, said Schork. If we are paying more for our gasoline at Labor Day than Memorial Day, then it was an absolute failure.
For that to happen, gas prices would have to rise to an average of $3.8085, the level they stood at on May 27.
SPRs Diminishing Impact?
At the same time, the SPR decision may have been aimed at prodding OPEC to increase production in the future. The oil cartel surprised the oil markets last month by declining to boost output, much to the dismay of the U.S. and OPEC doves like Saudi Arabia.
Even Kloza sees the problem with this logic, however.
Youre dealing with two sociopathic groups, he said, pointing to traders, who can be individually brilliant, but together absolutely represent a maddening crowd, and the anti-American leaders of Iran and Venezuela: Mahmoud Ahmadinejad and Hugo Chavez.
The other two times the U.S tapped the SPR occurred in 1991 and 2005 in response to shortages caused by the first Gulf War and Hurricane Katrina, respectively.
In 1991, the release of 17.3 million barrels of crude caused crude to plunge 30% after 10 days. The 2005 release of 11 million barrels of crude helped push crude down 3% over that span. However, ten days after this years release, crude was off just 1% and it has already climbed over the pre-release level.
Zimmerman said the oil markets may be building up an immunity. That would mean policymakers may be facing a credibility problem, akin to the boy who cried wolf.
The more times you revert to an SPR release to try and cool off an overheated crude oil market, the more the market will realize this is just smoke and mirrors, he said.