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Strategic Petroleum Reserve Release Under Fire -- For Being Effective

Argue all you want about the release of 60 million barrels of crude oil from the International Energy Agency, but one thing you can't argue is the level of its effectiveness.
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Argue all you want about the release of 60 million barrels of crude oil from the International Energy Agency, including 30 million barrels from our own Strategic Petroleum Reserve, but one thing you can't argue is the level of its effectiveness -- it is killing the speculators and dropping prices like a stone, at least for now.

A lot of pushback from market analysts and oil mavens has emerged in the 24 hours since the IEA decision -- that President Obama's decision was politically motivated for one. Other pundits are convinced that the announcement was coordinated with the Bernanke speech that noted the slowdown in growth acceleration since the start of the recovery. Others are calling the SPR release a new "stimulus" plan, being used because so little is left to be done and the Federal Reserve is holding off on fresh monetary loosening, at least for the present.

Argue all the rationales you like, a different QE3, a way for Obama to get ahead of the 2012 elections, I don't know -- but whatever you do, don't argue how incredibly effective it's been and how much it will drop gasoline prices, even if only in the short term.

Crude oil dropped more than 6% on Thursday alone, despite the fact that the SPR release will represent a literal drop in the bucket -- that 60 million barrels is equivalent to 16 hours of global demand, nothing more. The downward move in prices that this release has created, considering how small it is, is nothing less than stunning.

It strikes at the heart of the speculators who have been flooding into the oil trade since the start of the year and particularly since the Egypt unrest. It is signalling, whether rightly or wrongly, that sovereign nations are going to use some pretty unorthodox tools to getting at and getting out some of that spec money with no connection to oil other than the desire to make money from a rising price. Along with margin hikes in the past month, this tool should scare the bejeezus out of the hedge fund players and prop desks -- the White House intimated that this release should not be considered a "one time only" event. As a market player, you've got to be nervous holding long positions with the influence of an SPR release being held over your head.

The timing also couldn't have been better -- It is when markets are under pressure that bearish news has the biggest impact. That's why the argument that oil prices were already coming down and the release was therefore unnecessary was misguided -- for full effectiveness, you'd want to release it as a straw to break a camel's back. With oil streaking higher, a release of reserves would have had far less impact.

Will more releases happen? Will this release "do the job" fully? Will it drop prices for the long-haul? Was it a misuse of the SPR and the reason it was created? Is this a political short-term answer to a mismanaged long-term energy policy?

All good questions, worthy of answers. But for now, there's no need to argue how much it has helped, if you're in favor of lower prices -- it's helped a lot.

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