SPR thoughts from Joe Weisenthal at Bloomberg
This morning Joe Weisenthal at Bloomberg wrote:
Yesterday we got the latest inflation data and it was pretty terrible. The sequential headline increase was just 0.1%, but that's just because oil prices keep tumbling. Core inflation was up a blistering 0.6% month-over-month. Unfortunately, basically everything came in hot ex-oil.
And when it comes to oil itself, it seems likely that one driver of the downward move is the selling from the Strategic Petroleum Reserve.
It's funny, there's that popular cliche "the Fed can't print oil" and of course that's true. But in a sense, because the SPR exists, the government has in fact been "printing" more barrels. However, this ability is obviously finite.
So to some extent, the one big deflationary driver, the one thing keeping something of a lid on headline inflation, is long-term unsustainable.
Of course, the administration has indicated in the past that it plans to refill the SPR, making purchase commitments in the future. This guarantees a bid for domestic producers, and avoids the problem of a tumble in prices depressing domestic production. But so far, the size and clarity of that commitment remains somewhat unclear.
Bloomberg reported on Tuesday that the administration is weighing purchases of oil sub-$80 in order to preserve domestic production growth, but again, the details of the purchases remains unclear and unofficial.
Remember, the opportunity at hand exists because the oil futures curve looks like this, where near-term or spot prices are solidly above prices on the curve in 2023 and beyond. In theory, the administration can go short spot (selling oil) while going long (buying futures). Reducing prices at the pump, maintaining the demand signal for producers, and of course ultimately refilling these strategic stocks. This was the idea presented by Employ America all the way back in March.
Since then, The White House has made moves on this front. But there are questions about implementation that are still unclear. In the meantime, the clock is ticking, because this one big disinflationary impulse can only be used for so long. The risk remains that at some point the SPR selling stops (because it has to), the downward pressure on oil dissipates, the reserves are left in a depleted state, and domestic production still remains muted.