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Strategic Release of 60 Million Barrels of Oil Means Nothing

The United States is teaming with other countries to release 60 million barrels of oil from strategic reserves to quell market speculation. To bad it won’t mean anything.

Oil Speculation

The economic recovery is starting to stall and much of the reason is related to the high oil prices being seen. The question is how much of these prices are speculative investment from parties looking to hedge weak currencies and how much is a supply problem. We are about to find out.

Strategy

The countries involved in the release are trying to artificially impact the price of oil by creating excess supply. This is the basic principal of capitalism – supply and demand. The more supply there is, the lower prices go.

So, is the strategy working? Yes, at least initially. The price of oil is down $8, but still is at $106 a barrel. Financial experts are making noises about this government move being the move that forces speculators out of the market. I tend to doubt it for a very simple reason – this is a blip in supply. 60 million barrels is less than a day of demand in the world which currently uses well in excess of 80 million barrels a day. One has to think speculators will figure it out.

Countries Involved

The United States is the big mover on this front. It is releasing 30 million barrels from its 700 million plus reserves. European countries will release another 30 percent of the supply and Pacific oil producing countries will make up the rest.

Desperation

The interesting thing about this move is it reeks of desperation. The strategic reserves are just that – strategic. They are designed to be used as a last resort and flooding the market with extra supply is a desperate move. This may just reflect speculation gone wild, but it is also a preview of what we could see over the next few years as supply becomes strained and peak oil rears its ugly head.

The strategic release of 60 million barrels of oil means nothing in the big picture. Perhaps skittish investors will leave the market, but I personally can’t see it. After all, where will they go with their money?

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