Markets are beginning the week with some steep losses, following allegations that Trump may intervene to lower fuel prices. Crude oil began to recover on Friday after last Wednesday’s huge sell-off, but those losses have eroded this morning. Crude managed to reach $71 on Friday; this morning crude prices are trading at $69.32, a loss of $1.69 (2.4%) since Friday’s close.
Fuel prices are falling in sympathy with crude. While prices rose moderately on Friday, fuel prices today are back in the range of their July lows. Diesel prices are trading at $2.0857, a loss of 4.8 cents (2.2%) since Friday. Gasoline prices are $2.0491, a loss of 5.8 cents (2.7%).
Both fuel and crude prices have seen dramatic fluctuations lately – often a sign of market uncertainty. Prices rise rapidly as headlines spur quick trading – followed by an equally quick sell-off and market crash. At times like these it’s easy to get lost in the bullish/bearish mindset, while overall prices remain range-bound for a period. A good example was 2016-2017, when prices repeatedly fluctuated from $45-$55, up and down, for almost a year. Whether $65-$75 is the new range is yet to be seen – there’s a credible path for prices to rocket up to $80 or $90 if supplies once again become tight, or to decline such that $60-$70 is the new range. The risk does appears asymmetric, though, with $20 upside and $5-$10 downside risk.
How Trump Could Lower Fuel Prices
The steep market sell-off over the weekend comes as rumors swirl over Trump’s reaction to high oil prices. For months, he’s been tweeting at OPEC to resolve high oil prices, saying their production cut agreement is keeping prices artificially high. But rumors have begun to spread that Trump might take matters into his own hands. The mechanism? A release from the Strategic Petroleum Reserve to feed hungry oil markets.
The Strategic Petroleum Reserve (SPR), created in the 70s after the Energy Crisis, holds about 650 million barrels of crude oil in Texas and Louisiana. In the past, presidents have chosen to draw from the SPR to help alleviate high gas prices, as Clinton did in the 90s, though the purpose of the fund is meant for emergencies. Releases were authorized in the early 90s during Desert Storm, and Clinton released 28 million barrels for fuel price relief in ’96. The reserve has also been tapped during natural disasters such as Katrina and Harvey to help jump-start refining in devastated areas.
Last year Trump considered clearing half the SPR as a budgetary tool. Now, market allegations have risen pointing to a possible withdrawal. Most of these claims have been purely speculative – merely pointing out the possibility, rather than citing any credible decision-making. Recently, however, subjects close to Trump have alleged the administration is truly considering a release ranging from 5 – 30 million barrels.
The release would need to be fairly large to have any dent on markets. Last week, U.S. inventories (excluding SPR) fell by 12 million barrels in a week. Even a 30 million barrel injection would only distort markets for a few weeks before wearing off. The SPR is not meant to be a long-term market mover, but it certainly can have a short-term impact. The mere possibility of a release has brought comfort to the market – they believe the government is watching prices and will react as needed.
The administration has yet to publicly announce the decision. Energy Secretary Rick Perry said last month the SPR was for emergency use only, not for price manipulation. The Wall Street Journal reported prices would have to rise at least 10% higher (to the $75-$80 range) before such a move would be considered.
But while the administration has previously avoided a release, the timing may be too convenient to ignore. With midterm elections approaching, rising gasoline prices are always a point of concern for the President’s party. Fuel prices are a very transparent cost-point for consumers; it’s yet to be seen whether voters will buy Trump’s allegations that OPEC is the root cause of higher prices. A release from the SPR could bode well with voters, showing that Trump and his party are actively fighting against higher oil prices.