In recent weeks, a cloud has cast a shadow over oil markets as prices have soared across an industry landscape marked by economic uncertainty. After rising earlier in the season, oil prices fell a few days ago amid rising Covid-19 concerns overseas. However, yesterday brought news that has the financial community on its toes, as President Joe Biden announced that the U.S. would be tapping into its Strategic Petroleum Reserve in an effort to curb the rising gas prices that have stemmed from the recent inflationary trends.
So what do investors need to know about the Strategic Petroleum Reserve? And what might this action mean for the broader markets? Let’s take a look.
As the statement released by the White House summarizes,
“Today, the President is announcing that the Department of Energy will make available releases of 50 million barrels of oil from the Strategic Petroleum Reserve to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.”
With this type of news dominating coverage, both oil prices and the stocks of oil mining companies are going to be heavily watched today. As of this writing, oil stocks are primarily in the green, with shares of companies such as ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM) and Chevron Corporation (NYSE:CVX) all rising within the first hour of trading.
Let’s discuss the events of the day in more detail and find out what investors should be watching for.
What Should Investors Know About the Strategic Petroleum Reserve?
- What is the Strategic Petroleum Reserve? According to the U.S. Department of Energy, it is “a U.S. Government complex of four sites with deep underground storage caverns created in salt domes along the Texas and Louisiana Gulf Coasts.”
- As of Nov. 19, the Strategic Petroleum Reserve’s holdings across four sites amounted to approximately 604.5 million barrels.
- This move is a calculated effort that involves several other nations, including China, Japan and India, as well as the United Kingdom and the Republic of Korea.
- The release of 50 million oil barrels will take place in two ways. First, 32 million barrels will be released over several coming months, which should provide relief to Americans by lowering oil and gas prices in the short term. Second, the remaining 18 barrels will be sold in acceleration as part of a sale previously authorized by Congress.
- This news comes at a time when energy prices are surging to record numbers. Indeed, West Texas intermediate crude futures recently exceeded their seven-year-high price as they passed $85. Additionally, the national average for a gallon of gas has followed a similarly high trajectory. It rose from $2.11 to $$3.409 over the course of this year.
- John Kilduff of Again Capital has praised the timing of the Biden administration’s decision. As he states, it should “help to bridge the production shortfall ahead of winter.” This is particularly true if the U.S. receives confirmation of meaningful supply from the large Asian nations also taking part.
- Following the announcement, oil pries dipped to a per-barrel price of $75.30, a decrease of just under 2%.
- The White House statement also conveyed that President Biden is prepared to take further action if it is deemed necessary. Additionally, the president intends to coordinate with the rest of the world to “maintain adequate supply” as we move forward toward a post-pandemic world.
The Bottom Line
The implications of the decision could be either positive or negative. However, so far, they seem to be leaning in a positive direction. Whenever significant policy decisions are signed into effect, there is always a fundamental uncertain factor. This often causes investors to proceed with caution.
However, in this case, it seems these actions from governments across the globe have been priced into oil markets. Therefore, investors should have less cause to worry.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
