by Kevin Kerr
Wednesday, June 29, 2011 at 7:30am
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The sudden announcement last week that the International Energy Agency (IEA) would release strategic oil supplies onto the world markets caused a significant selloff. And crude oil prices dropped around $9 in about two days.
Mission accomplished? Hardly!
The 60 million barrel release from the Strategic Petroleum Reserve (SPR) is merely a drop in the bucket of global usage, and will likely have the opposite effect on prices longer term. The move is simply more psychological window dressing for the comic theater that is happening in Washington right now. It would be funny, if it wasn’t so sad.
In fact, it’s really a sign of …
Desperate Measures
By releasing supplies from the SPR with crude at around $90, if prices do run up again, the administration will have to fill the SPR back up at a higher price. And as shown in the chart below, a big chunk of that oil will come from outside our borders.
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| The Strategic Petroleum Reserve is intended solely for emergencies that threaten the U.S. economy or national security. |
It’s another foolish rob-Peter-to-pay-Paul action by the imploding U.S. government.
The careless action taken by the IEA and President Obama, has now underscored how worried they actually are about global economic growth and tight supplies. So in essence this move could actually stoke the fire to drive prices much higher, much more quickly.
In a recent Bloomberg report, Caroline Bain, of the Economist Intelligence Unit, was quoted as saying:
“Although the immediate impact of the IEA’s reserve release will be to depress prices, in the more medium term, it could actually be bullish for prices. Reserves are finite and cannot be released forever.”
Unlike Uncle Ben’s printing press that never seems to run out of ink, oil supplies are not something the U.S. government can simply print more of.
To put the gravity of the situation in perspective, this is only the third time in the past 50 years that IEA has released strategic reserves. And in order to tap the SPR, President Obama had to authorize it.
Frighteningly, the prior two times resulted in super-spikes. And I think we can expect that record to hit 3-0 very shortly.
It’ll Be Different This Time,
Just Not in a Good Way
Many things are very different this time around that make it even more unlikely this small release of oil will have any measured impact to the downside.
For instance, we don’t have the added supplies of barrels of North Sea Crude to help cushion prices.
Supplies from Norway are falling fast, and Norwegian oil production decline is devastating. The figures from some of the producers are downright scary …
According to reports, production has fallen in the region by more than 20 percent from 1991 levels. Problems have included: Corrosion of old infrastructures combined with a lack of proper investments prior to the merger of Norway’s two largest oil groups, Statoil and Norsk Hydro.
Meanwhile production from Mexico’s oil fields, which the U.S. also has counted on heavily in the past, is also falling drastically. So the likelihood of the SPR release bringing any sustained relief to oil prices and thus consumers, is highly unlikely.
No Real Answers …
Just Fairy Tales!
The recent correction in commodities across the board is a welcome opportunity for those who can step out of the land of unicorns and candy canes for a moment, and see the true disaster that is unfolding before us, especially in the energy sector.
Bloomberg recently quoted a top trader, Michael Cuggino, who helps manage $13.5 billion at Permanent Portfolio Funds in San Francisco:
“I still like the growth story. Commodity prices are going to continue to go higher. Worldwide, the economy continues to grow and monetary policy is going to stay relatively consistent with no changes.”
Amen.
Basically, by wasting valuable years that could have been used for research and development, drilling, and creation of alternatives, the U.S. has set itself up to be dependent on oil supplies from people whose ultimate goal is to destroy us.
A nightmare.
Couple that with the ongoing endless printing of dollars by the Fed and the ever-rising debt ceiling, and you have a recipe for disaster. So what is an investor to do?
Bent Over a Barrel
As investors and consumers we have to choose our own belief in what the reality of the situation in the U.S. is right now. But clearly job losses and lower wages, at the same time as rising food and energy costs, are a very bad combination. Regardless of what some government reports may show.
The national debt just seems to grow and grow and grow, and yet no real answers are being sought on how to change the underlying problems. And the partisan bickering and lack of any true energy policy in the U.S. is the biggest joke of all.
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| We need oil — and lots of it — to make everything from bubble gum to shower curtains to bandages. |
The fact of the matter is that when it comes to oil supplies the U.S. is bent over a barrel and not doing anything about it. The days of cheap energy supplies are over. And that translates into higher costs for everything that uses oil or related products. Transportation, manufacturing, industrial, building … you name it. Basically everything.
The bottom line: We all have exposure to higher oil prices, so we must find a way to invest in the rise to offset some of the costs and even profit from the inevitable.
There are many ways to invest in the energy markets … from commodity futures and options to individual energy stocks. But often the volatility and risks of these vehicles can dissuade some investors.
However one of the best ways I know for investing in rising energy prices are key energy ETFs, and ETF options should you want more leverage. Here are two possible opportunities you might consider:
PowerShares DB Oil (DBO): To play energy in the short-term, futures-based ETFs such as DBO are designed to help you accomplish that. While these funds aren’t intended to track the spot price of oil, they’ll often correlate better than equity-based funds.
SPDR S&P Oil & Gas E&P (XOP): Oil companies have been raking in profits hand over fist for the last several years, so it only makes sense that higher oil prices will continue that trend. And with this IEA-inspired pullback we could see those prices surge even more. So XOP, which tracks the performance of the oil and gas exploration and production portion of the S&P Total Market Index, could be a real winner.
There are many more oil-related ETFs to keep your eye on, and you can expect more to come out as this story is just heating up.
Yours for resource profits,
Kevin
Kevin Kerr has successfully traded commodities professionally for the last 22+ years. He a regular contributor to news outlets including CNBC, CNN, FOX News, CBS Evening News, and Nightly Business Report.
Source: Money and Markets