Yesterday, a rumour that the U.S. and U.K. were nearing an agreement on tapping the Strategic Petroleum Reserve (SPR) sent oil prices diving.That turned out to be a rumour—the first of many we could see as investors continue to freak out about elevated oil prices amid mounting tensions with Iran.
But don’t expect a formal announcement any time soon. Eurasia Group’s Greg Priddy, Director of Global Oil research, says that we shouldn’t expect a formal announcement until April at the very earliest, and May realistically. However, he suggests that we probably will see the Obama administration act to push down high prices if they continue to threaten the economic recovery—and the President’s reelection chances.
Priddy explains what we can expect in an investor note published today:
The Obama administration will not be willing to wait into the summer US driving season to make a decision about whether to use the US SPR to try to bring mitigate the impact on summer gasoline prices. However, it is not likely that a formal announcement will be made before April. The expectations for an announcement are building, but the timing of a release is most likely in May – in time to pump up inventories for the summer in the US and offset some US crude oil imports in a way which will help bring down global prices, but with the effect lasting through the summer. There is certain to be a realisation that an SPR release must be of limited duration and volume – probably 60 million barrels over 2 months as a maximum – rather than being a long-term offset for any lost volumes from Iran. A larger drawdown over a longer duration would leave the US in an overly vulnerable position should a military strike against Iran happen, which would demand a drawdown of crude more toward the SPR’s 4 million bpd maximum daily capacity to calm markets. Thus, this limited release will be timed for maximum impact during the US summer driving season.