I know marketwatch are permabears, but I thought this article had some interesting info I hadn’t seen before.
It’s just a small buy for now, but I could see this alleviating some of the pressure on the front-month contract:
The U.S. Energy Department said Wednesday that it has released a “Request for Proposals” to buy up to one million barrels of sweet crude oil to test the conditions of physical oil available to the Strategic Petroleum Reserve.
The department plans to buy oil sourced from small to midsize U.S. oil producers and delivery will be made to one or more of the three SPR storage sites during July, with early deliveries accepted in June. The purchase would complement deliveries of crude that are currently scheduled for June or July under the Energy Department’s oil storage initiative that was launched in April.
For the week ended May 8, 1.9 million barrels of crude oil was added to the SPR to total 639.8 million barrels. The reserve’s current storage capacity is 713.5 million barrels. June West Texas Intermediate crude clj20 traded at $25.61 a barrel in electronic trading, up from the $25.29 Nymex settlement.
Basically the government is trying to intervene and buy oil so that small/midsize producers don’t have to stop pumping and don’t have to store it. Given the way these government programs have worked so far this year, I have no confidence that’s actually how this will work, even if that’s the moderate form of intervention. They’ll get sold into by big oil, or get sold futures oil deliveries.
Note the part where they accept early deliveries in June? So who’s going to lowball a bid, buy up a million barrels of front-month futures this month or next, and get paid to deliver dirt-cheap futures contract overflow to the government?
If a small oil company doesn’t leverage that trade opportunity they’re stupid. And I bet you this is just the start of what the government buys. Might even be able to prop up part of the stock market with it too – the S&P was tracking oil hard a couple times today.
If the government starts buying for real, futures oil will never go below spot price, unless it’s by the marginal cost of delivery. Who would sell for less if you could buy futures and sell at spot to the government?
Yeah this is all conjecture-level DD but maybe it will give you guys some interesting ideas on how it will impact prices and how to play it.
Edit: According to this link buying up to the capacity of the Strategic Oil Reserve has been in the works for a while. Not sure how I missed that, all I’d seen previously was Trump’s offer to let private companies store oil in government facilities temporarily, hadn’t heard about the plan to buy to capacity.
That means that 1 million barrels is definitely just to get the ball rolling, and they’ll be buying another 69+ million barrels in the near future on Trump’s orders.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.