Hours before accepting his Democratic nomination September 6th, President Barack Obama wasn’t exactly focused on how he’d be presenting his speech to the crowd gathered in Charlotte, North Carolina. Instead, the President was busy meeting with industry experts in the oil industry, National Security Council officials, members of the Treasury, and members of the Department of Defense. They discussed the rise in oil prices this nation has experienced in the past year, with raised concerns directing from a rapid growth in prices since June. Brent Crude Oil, the leading global price benchmark for Atlantic crude oils, increased from a price of $89.22 a barrel on June 22 to a steady range between $112.50 and $117.50 a barrel over the past month.
President Obama has felt increased pressure to increase the supply of oil in the market as prices have recently spiked. He has consulted oil experts on how oil prices may react if this emergency oil is indeed tapped. A first emergency reserve had been released to global markets by the International Energy Agency (IEA) in June of last year, raising questions regarding the intent of the timing of another release. Simple economics tells us that an increase in the supply of oil would decrease the prices in the market, a statistic that would be sure to boost President Obama’s hopes of reelection. Strongest opposition is expectedly coming from Republicans who claim that these reserves should not and cannot be tapped. They have been arguing that this reserve should only be turned to in the case of a serious disaster in oil supply, one that has effects similar to that of which Hurricane Katrina had when it cribbed large oil refineries in the Gulf Coast. We would also like to note that the President’s Administration has opposed efforts by the GOP to increase oil drilling though in 2009 it did provide a $2B subsidy to Petrobras (PBR), a multi-billion dollar oil conglomerate that is controlled by the Government of Brazil and George Soros owned a significant stake in Petrobras at the time.
Original talks about the tapping of this reserve began in March between President Obama and British Prime Minister David Cameron when they developed a foundation for implementation of a potential plan. Further actions were planned during the spring but were halted by a surprising drop in oil prices during this season. Prices dropped from $128 a barrel in March to levels around $90 just three months later in June. This sharp decrease was caused in large part due to drop in demand for oil, especially in Europe. As the entire European continent has faced difficult economic troubles, many countries experienced record high unemployment rates across the continent, causing demand for oil to plunge. Unfortunately, violence in Libya and fears of potential war between Israel and Iran severely impacted the supply of oil to the United States, resulting in a substantial jump of the price of Brent Crude Oil to steady triple digit prices. President Obama has made signals that now will be his time to take charge against these towering prices that have been restraining U.S. and European economies for over a year now. Government officials held further meetings with oil experts during July, where it was determined that they would wait till after Labor Day to make any final decisions, making any action now seem imminent.
Officials have indicated that if a release would indeed occur, it could potentially amount to over 200 million barrel of the 600+ million barrel reserve saved for emergency use. This rumored amount would be over 140 million barrels more than the IEA released to its 28 members in June of last year. This enormous amount would vastly increase the supply of oil in the United States and undoubtedly led to a strong drop in the price of Crude Oil. Within 3 days of the release by the IEA oil prices declined by 8 cents, only paving the road for the optimism that could follow in price drops from a substantially larger tap.
If prices do decline as expected in the coming months, possible investment opportunities may arise. The price of Brent Crude Oil is tracked by a domestic exchange traded security, United States Brent Crude (BNO). Prices between the two have historically been extremely closely correlated. Price shifts in Brent Crude Oil will result in similar changes in BNO. A significant decline in price that could come with a future announcement from President Obama would result in a proportional drop in the price of the ETF, and create an opportunity for bearish investors to cash in.
Correlation between the two prices can be seen below:
The recent jobs report for the month of August displayed the poor growth existent in the economy and will put even more pressure on President Obama as the November election approaches. With unemployment, jobs growth, and wages all showing weak growth, the President’s resume isn’t looking too pleasant. A tapping of the second emergency oil reserve may give him the safety boost he needs during these times.
The increase in supply of oil that could soon take place, accompanied with no sudden increase in consumer demand, would surely decrease the market price of oil and the prices consumers pay at the pump. With the election approaching in the coming months, it seems that President Obama is sure to tap into the national emergency oil reserve in an attempt to stabilize the high prices that have existed in the market for a large portion of his first term. Questions about the global economy create undoubted risks about the long term pricing of crude oil but with reserves surely to be tapped in the near future, short term oil prices look destined for a dramatic dip.
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