Counterintutiive -- November 23, 2021

Brandon announced today, Tuesday, that he would release oil from the SPR. It's probably not "legal" but we will see how it plays out.

The "elizabethwarrens" of the world hoped for two things:

• the price of gasoline would fall; and,
• profits of the oil companies would fall.

We'll see how far the price of gasoline drops.

But surprise, surprise: shares in oil companies are all up today. Does that surprise you?

• CVX: up 1.16%
• XOM: up 0.8%
• Shell: up 0.5%
• BP: up 1.31%
• COP: up 1.4%

Pre-market, after the SPR release announcement. 

It seems counterintuitive. 

Can it be explained if it seem counterintuitive?  Yes.

If, all things being equal, investors/analysts value oil companies more (share prices of oil companies increase) with the announcement of a release of crude oil from the SPR, how can this be?

Thoughts?

Two thoughts, one macroeconomic, as it were, and the second, a misunderstanding of how the SPR works.

Macroeconomic:

• remove all the politics and just get back to keeping it simple: US presidents don't do things that aren't rational [don't get me started]
  
• how could this be rational?
• what is the SPR for?
• for those periods of time when demand greatly exceeds supply
• [break, break: who needed the release of crude oil from the SPR the most?]
• when one removes all the politics and talk of virtual signaling, opening the SPR means one thing: demand is severely greater than supply, and unlike the old days, OPEC+ is either unwilling or unable to increase production;
• analysts see the release of crude oil from the SPR as Brandon trying to get ahead of the debacle that the supple/demand imbalance could lead to this next spring;

Misunderstanding of the SPR:

• this is most interesting;
• if this is correct, it tells me that Brandon and team do not understand "oil" [or the SPR] at all;
• withdrawal from the SPR is a "swap." It's not a direct dollar trade; companies do not pay for oil they "take" from the SPR; they are simply required to "replace" the amount of oil they take with like amount sometime in the future
• oil companies have contracts with their customers (their shippers and their refiners)
• if they can get oil for free (from the SPR), holy mackerel, short term their profits surge; they can cut back on their own drilling, and their own shipping (generally the SPR caverns are closer to the refineries) and replace with oil from the SPR;
• okay. But if that's right, won't their profits be adversely impacted when they have to replace that crude oil sometime in the future
• two things: analysts don't think that far ahead; they're looking at profits now (the current six months)
• but this is where it gets really, really interesting. Even though it's a swap, the fact is we are in a period of backwardation: oil prices are now higher than they are expected to be in the future -- that's a fact, Jack -- we're in a period of backwardation -- though many in the industry see the demand/supply imbalance worsening in the future -- but right now, the numbers tell us we are in a period of backwardation;
• backwardation means oil companies are taking out "more expensive" oil now from the SPR and will be replacing it with "less expensive" oil in the future.

I'm sure the analysts and experts will have their own explanations.

By the way, earlier I asked: who needs the release of crude oil from the SPR the most?

Did anyone paying attention?

What's happening this week?

Yes, it's only the busiest airline travel day/week of the year. Already the TSA is reporting record number of passengers being screened. Airline passengers are now at 2019, pre-covid, levels.

Yesterday, CNBC showed a graphic showing the fuel demand surge airlines are facing. The airlines must have a huge, huge lobby in Washington, DC, and they let the politicos know how high fuel prices would impact the American flying consumer. A lot of politicos and their staffers are flying home for the Christmas break.