The Council on Foreign Relations has a good read out today on what lessons the White House and world leaders should take from last year’s Strategic Petroleum Reserve drawdown when they consider tapping emergency oil stockpiles again.
As we keep hearing from oil analysts whenever the Obama administration leaks word of another possible sale, any impact on the market will probably be short-lived.
Blake Clayton, author of the CFR report, shows that Brent crude prices dipped 6% the same day that the US and International Energy Agency announced they would sell 60 million barrels of crude and refined products on June 23, 2011. Prices fell 2% the next day. But eight days later, prices returned to the pre-announcement level.
That’s not to say that the drawdown failed its purpose. It could have prevented a major price spike during the second half of 2011, but it’s impossible to pinpoint the release’s role versus broader market forces.
The paper looks at the difficulty of building consensus within IEA. It shows how leaks revealing dissension among member countries and the market’s speculation about what that said about IEA’s next move sent prices whipsawing.
It also picks up on the question of whether US pipeline reversals have hampered the SPR’s ability to get oil into the market quickly. In an angle Platts has followed closely, Citi’s Ed Morse argues that there’s no way the SPR can deliver at a rate of 4.25 million b/d, as the Department of Energy contends.
Like the Bipartisan Policy Center, CFR recommends that the government hold a test drawdown and sale, then publicly disclose the results to demonstrate the current release rate.
“If market participants harbor doubts about the flow capacity of the US SPR, they may discount its ability to help offset any sudden supply shortages, rendering it a less effective tool for calming the market,” Clayton writes. “Greater transparency about the SPR’s capabilities, particularly in light of profound recent changes in the North American oil landscape, would be sensible.”
CFR’s full list of recommendations for policymakers is worth a read. Here are the ones pertaining to market perception and effects on oil prices:
- Emergency oil releases may have only a modest impact on prices, and broader market forces can easily overwhelm them. Ultimately, emergency releases may be more effective at preventing harmful price spikes than actually lowering prices.
- Market participants may view an emergency release as signaling future tightness in the oil market, which risks raising long-term prices and can feed back into higher short-term prices.
- The threat of releasing stocks may be useful to policymakers as a tool for tamping down prices in the short term, but only if that threat appears credible. Mixed signals from energy officials about a possible future release, as in July 2011, can make oil prices even more volatile.
- A release’s effectiveness hinges on how it is structured. The better that IEA member countries tailor a release to the market’s needs at the time, the greater its chances of influencing prices.