Goldman’s history lesson on oil releases

Posted by Cardiff Garciaon Jun 23 20:50.

Exchange or sale?

That’s the question the Goldman Sachs commodities research group is waiting for the US to answer before making a call on how today’s IEA announcement will ultimately affect oil prices through next year.

The question refers to the allocation mechanism used by the US, which is providing roughly half of the 60 million barrels being released. We don’t know yet, and Goldman uses a lesson from recent US history to explain why it matters:

However, we will not know the exact nature of the release and the amount of barrels that will ultimately enter the market until we know the allocation mechanism which will be used in the release. At this point, it is not clear whether the release will be through a direct sale of the crude oil and product or an exchange, which is basically a loan of physical barrels of crude oil.

For example, President Clinton authorized the release of 30 million barrels of oil within 30 days from the US SPR in September 2000. The SPR release was done through an exchange program in which firms taking oil promised to return slightly more barrels than they borrowed within the next 12 months. The reaction to the announcement was a more than $6.00/bbl drop in WTI crude oil prices over the following week (see Exhibit 3). However, because physical barrels of crude oil were required to be returned to the US SPR within the next 12 months, there was very little impact on contract prices farther out the WTI forward curve (see Exhibit 4).

Net, we would expect that if the emergency release is implemented through an exchange program there will be less of an impact on crude oil prices for 2012 and beyond than if it is implemented through a direct sale, which would leave more uncertainty over when the government would choose to refill the SPR.

Consequently, we are waiting until more information is available on the mechanism of the release to formally change our crude oil price forecasts. However, we would expect to potentially lower our near-dated Brent crude oil price forecasts by near $10-12/bbl, which would move our 3-month Brent crude oil price target of $117/bbl closer to $105-107/bbl, and to potentially lower our 2012 forecast of $130/bbl by close to $5-7/bbl, toward $123- 125/bbl.

Got that? Exchange = less impact; sale = more uncertainty.

In the meantime, here’s what the group expects to happen in the short-term:

(1) downward pressure on near-term Brent crude oil prices, (2) narrowing light-heavy and sweet-sour differentials, and (3) weakening LLS- Brent spreads, which could potentially reverse the arb once again.

More detail in the usual place.

Related links:
And now Goldman says the commodities correction is over – FT Alphaville
Goldman reiterates bearish call on commods (again) – FT Alphaville

This entry was posted by Cardiff Garcia on Thursday, June 23rd, 2011 at 20:50 and is filed under Capital markets, Commodities. Tagged with , , , .

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