Robert Campbell at Reuters makes some great points on Wednesday about the diminishing influence of SPR-release talk.
Like us, he compares the SPR, and its releases, to central-bank type operations for the oil market — but notes that what might be deemed the SPR transmission mechanism is now being clogged up:
It is a problem familiar to central bankers: under certain weak economic conditions the tools available to policymakers become ineffective, hence the expression “pushing on a string.” Western governments wishing to undo this summer’s geopolitically-induced oil rally (incidentally, one of their making) face a conundrum similar to central bankers’ puzzles. The tools available to those seeking to drive the oil price lower are for the most part strategic crude oil reserves located in the United States. Yet a combination of circumstances in the global oil market has robbed these reserves of some of their power. In other words, another release of U.S. crude oil reserves, even in coordination with other partners, may not have the desired impact on crude prices.
This helps to explain the mixed signals coming out of the G7 nations and the International Energy Agency. On the one hand the Group of Seven most industrialized nations warned late last month governments were ready to tap strategic reserves to offset rising prices. On the other, the IEA, even after modifying its language in its most recent pronouncements, has still highlighted the fact that in its view “crude markets are reasonably well supplied.”
As Campbell explains, the problem (as in the eurozone) is the bifurcation of the market. For the most part, he notes, the global oil market is not short of crude oil, it’s just that Western sanctions against Iran have created logistical issues which are now impacting oil distribution.
The other issue is that it’s arguably not a lack of oil that’s squeezing prices, but a reluctance by oil market participants to hold product inventories.
As he sums up:
Oil product markets are in backwardation not so much because there is a generalized scramble for a scarce commodity but rather because there is a generalized fear that the economy, and hence oil demand, could again fall into recession. Who wants to buy up expensive inventory only to have to sell it at a loss months later?
Until market players see more risk in relying on the spot market to cover short term supply shortages than from holding inventories, Western policymakers may struggle to gain much influence over the market with strategic stocks.
In other words, it doesn’t matter how much oil authorities release, the problem is that the “oil multiplier” isn’t working, because crude isn’t being converted to product inventory.
In short, refiners — just like banks — are fearful of sitting on too much inventory just in case the economy turns for the worse. Banks are reluctant to convert base money into credit, something that adds to money supply, because they fear it might turn into a depreciating asset. Refiners, on the other hand, fear converting oil to product because they don’t want product inventories to turn into depreciating assets on their own balance sheets.
All of which results in refiners under-producing, or producing only what they can be absolutely certain of selling (and on very tight schedules), which naturally leads to tightness in the broad product market.
In so doing refiners pass the risk of inventory depreciation over to crude oil producers, who end up accumulating ever greater sums of idle crude that they can’t budge.
It is for that reason that a further SPR release could be very much like pushing on a string.