This is not an easy time to be an investor or a money manager. In fact, it’s not even an easy time to be in charge of buying or selling on behalf of the government. With oil sales from the Strategic Petroleum Reserve, the government would have been adding more oil supply into a market that doesn’t need more supply. That would have been 12 million barrels worth of oil, close to the 13 million or so barrels per day of domestic oil production.
The Saudi-Russian price war on oil, and the potentially increased availability of supply from Saudi Arabia, delivered enough of a knockout blow on Monday that even the government figured out it better stop making its planned sales of oil. West Texas Intermediate crude was trading above $40 last week, but after the OPEC+ meeting ended in total failure, the price of WTI oil has dropped to $30 to $33 per barrel.
According to the announcement on the U.S. Department of Energy’s website:
In light of the recent fluctuations in global oil markets, the U.S. Department of Energy is suspending the recently announced sale of crude oil from the Strategic Petroleum Reserve (SPR). The sale was designed to raise revenue for SPR facility maintenance and upgrades. Given current oil markets, this is not the optimal time for the sale. The Department continually monitors and evaluates global oil markets and will provide updated information as market conditions change.
Just a day earlier, roughly at the same time that a notice was given to workers to be able to work remotely from home, that the Energy Department announced that it was tracking the massive sell-off that was seen on Monday. Its statement said at that time:
The Trump Administration is closely monitoring the impact of Coronavirus (COVID-19), and the fallout from last week’s OPEC+ meeting on global oil markets. These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world. The United States, as the world’s largest producer of oil and gas, can and will withstand this volatility. The growth of the unconventional oil and gas industry in the United States has led to a more secure, resilient and flexible market. Thanks to President Trump’s pro-growth policies, America will remain the number one energy producer in the world. By prioritizing pro-growth reforms to tax, labor, regulation, energy, and healthcare policy the U.S. economy is more resilient than ever.
Secretary Brouillette is closely following the market impacts from these developments. He has been briefed by the Energy Information Administration (EIA), and held discussions with his counterparts and industry stakeholders around the globe.
This may seem ludicrous to those who support any versions of a “green deal,” but one tool that the United States could use to prevent deflation and to support the markets would be to announce purchases of oil rather than continued sales of it. It may seem counterintuitive, but there are several strategies that the government and Federal Reserve could use that could help far beyond what cutting interest rates and buying Treasuries could do.
Oil traded up over 5% at $32.95 per barrel of WTI on Tuesday morning.