Why The Market Didn't React To The Latest SPR News

On Monday, the US Department of Energy announced that it will begin buying crude oil to restock the Strategic Petroleum Reserve (SPR), the level of which hit a multi-decade low last year following the release of stocks from the reserve when crude prices jumped to over $120. The announcement was not really a surprise as Energy Secretary Jennifer Granholm had effectively told lawmakers last week that it was coming, but even so, the market reaction, basically a big yawn and shrug of the shoulders, was interesting, and it set me thinking about the SPR and how traders should react to its deployment and replenishment.

The first thing that came to mind is that Joe Biden and Secretary Granholm seem to be better energy traders than any of us! They sold crude at or near the top of the market and are now beginning to buy it back at prices around forty percent below where they sold. Of course, it helps when you selling by yourself creates a market top to some extent, but we can all learn from what occurred. Most people are aware that selling high and buying low is a good idea, but the temptation to do the exact opposite is always strong. “This has done well, so I should buy more” is for some reason a far more natural thought process than “this has done well, so I should sell” even though the first is far more logical.

Lessons about trading logically aside, though, the most remarkable thing about what happened on Monday is that the market barely moved.

Crude futures (CL) did trade higher on that day but didn’t even gain back the ground lost at the end of last week, a drop that came even as Granholm signaled her intentions to start buying. So, if sales from the SPR were so effective in creating a market top and a drop in price, why didn’t Monday’s announcement result in more of a move-up?

First, while the release of reserves certainly helped the market reverse last year, it wasn’t the only reason prices fell. The drop coincided with the start of aggressive rate hikes by the Fed, too, which introduced fears about economic growth, not just in the US but around the globe. That was partly responsible for the decline and also made the extra supply from the SPR more impactful than it might otherwise have been.

Then there is the matter of the purpose of the government selling and buying, and therefore the way it is managed. The sales from the SPR were designed to push prices lower and the most effective way to do that is to basically flood the market, whereas the last thing the government wants to do as they buy back is to force prices back above $100, so a more measured approach to purchases is required.

Politically, one could argue that that purpose was itself fundamentally wrong. The SPR is not supposed to exist to aid the government in manipulating prices for political expediency, so selling to counter damaging high gasoline costs was putting the country at risk unnecessarily. On the other hand, gas above $4 per gallon in America could be seen as seriously destabilizing, and OPEC+’s decision to squeeze tight supply even further as prices jumped could be construed as a deliberate attempt to destabilize. On that basis, acting in the name of national security can easily be justified. Whatever your view on that, though, the Department of Energy was trying to move prices when selling but trying not to when buying and the evidence so far suggests they have been successful in both.

As an interbank forex broker back in the 1980s, a time when central bank intervention in the currency markets were a regular occurrence, I learned quickly not to overreact to the government’s presence in the market, and to assess the motivation for any actions before reacting. Were they actually trying to move prices? Or were they defending a particular level without a desire to force the market lower, or simply squaring a previous position? When you ask the same questions about this week’s announcement from the Energy Secretary, it is clearly the last of those, so the lack of market reaction makes sense, and even with the government buying, CL can still move lower.