Moreover, if the intention is to bust the uptrend of oil price, and since Brent is currently regarded as more of the global benchmark than WTI, there are several technical entry points where the government could have done the SPR release to bust traders' momentum--for example, when Brent was at $100 to $115 levels in Jan/Feb, or around April when it hit $127 (See Chart Below)--all are more sensible than the current entry point. Gas Price Intervention - Six Months Too Late
According to AAA, as of Sunday, June 26, the national average regular unleaded gas has dropped to $3.575 a gallon, or 10%, from almost $4 a gallon on May 6. Gasoline price is still up about 30% year-over-year. So if it is really about giving consumers a break at the pump, intervention should have been implemented at least six months ago to nip it at the start of the run-up (See Chart Below). SPR Sale Actually Benefitting Speculators
Based on supply and demand analysis, I have long contended
that speculation is one significant factor in the recent surge of oil prices, particularly with Brent, since ICE exchange is essentially unregulated.
However, if you want to tap the SPR to quell the speculative enthusiasm, then the most effective timing of an SPR sale would be when players are predominantly long on oil. In an April 2011 article
, I questioned the SPR trigger release of the Obama Administration as despite much rhetoric, there was no action when Brent was reaching up to a record of $127, and gasoline in the U.S. was closing in on $4 a gallon.
Now that the markets are going through a correcting cycle and more speculators are taking the short position, the SPR release, instead of sending a warning message, most likely benefitted a lot of the speculators. $800 Million Lost Revenue
Even if we put aside the supply, price and economic concerns discussed so far, from a pure financial management standpoint, the U.S. government also failed miserably as you should sell close to the top, instead of at a near bottom. Reuters
reported that the U.S. will offer all 30 million barrels in one bid sale with a base price of $112.78 a barrel, which is based on the price of the Louisiana Light Sweet crude (LLS) in the five days prior to Thursday, June 23. Companies must submit their bids by June 29, and may bid above or below the base price. The payment and delivery are to take place in August.
From this SPR sale time table, the final sale price of the 30 million barrels most likely will be far less than the $112.78 base, and could even be closer to $95, as August is almost the end of the summer driving season, and more market weakness will start manifesting two months into the end of QE2.