Saturday, June 25, 2011

Phil Flynn on the Strategic Petroleum Reserve Oil release

"The market was screaming for action and the International Energy Agency acted.

Despite the critics of the surprise release of 60 million barrels

...the truth is they made the right move.

It was clear that if you listened to what the market was saying
it was telling you quite clearly that the combination of sub-par North Sea production
and the war in the Middle East was causing a serious enough disruption
to warrant some help from the International Energy Agency.

The market, as judged by the record breaking spread
of Brent Crude over the West Texas Intermediate,
showed the refining market was broken
and the International Energy Agency was correct in trying to fix it.

This is one of the reasons that strategic reserves are there
and that is to make up for major disruptions of supply
by things like acts of God and by acts of war.

...Believe it or not this move was just not done to move price
but to replace lost supply due to a major disruption due to war.

This is a disruption that constrained the supply of light sweet crude
that was causing a major headache not only in Europe
but was starting impact supply in the United States.

East coast supplies into New York harbor have been falling,
causing a spike in gas prices and impacting US consumers
as Brent crude stared to spin out of control.

While oil supply in the US is at the highest level since 1980,
because of the war in Libya, supplies in Europe are at a five year low.

Every day that Libya is off line
1.5 million barrels of high quality crude from the marketplace.

Don’t get thrown off by the argument that 60 million barrels is not enough to make a difference
because it would just about cover US demand for the weekend,
this is about quality not quantity.

While Saudi Arabia is pumping the most oil they have in 30 years to try to fill the void,
the quality of their crude is not going to help the European refiners
that can’t refine the sour crude the Saudis are putting out there.

The truth is that an influx of light sweet crude into the market place
could bridge the gap until North Sea production can get caught up.

This should not only beef up supply on the East Coast of the United States
as well as Europe.

...there is a precedent for what they did.

The IEA moved to replace supply after Iraq invaded Kuwait,
so disruptions due to war are a legitimate reason for a release.

...This is not about price but about supply.

Oil prices were already under pressure due to weak data in China
and the US and flashing red lights in Europe!

...I am not talking about another IMF type scandal
but European Central Bank President Jean-Claude Trichet
saying that risk signals for financial stability in the euro area are flashing “red”
as the debt crisis threatens ...Europe and the world.

...Keep moving, nothing to see here.

But perhaps a large reason for the weak moves the end of QE2.

The training wheels are coming off and we will see a period of adjustment
as the QE 2 stimulus goes away."

Phil Flynn

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