Oil Traders: Tapping Reserve Was ‘Genius’ Move by Obama

On Wednesday, crude futures settled on the NYMEX at $95.41, off 16 percent from their 2011 high of $113.93 hit on April 29th. This has pundits and politicians everywhere asking, "why would President Obama tap the Strategic Petroleum Reserve when oil prices were already falling?" The answer is simple: Obama knew this would have the maximum impact, hitting speculators on the chin, according to traders.

"Arguably the timing of the release is genius," said Stephen Weiss of Short Hills Capital. "If the SPR had been released as crude worked higher, the effect would have been relatively momentary, but releasing it now, with the momentum on crude prices turning down, will add to the price decline as speculators hit their stops and margin limits more quickly forcing them to sell."

Prices for WTI oil, the benchmark for the U.S., plunged as much as five percent on Thursday after the Department of Energy and the International Energy Agency announced a coordinated release of 60 million barrels from so-called emergency stockpiles.

"This is analogous to shorting a momentum stock," added Weiss, a veteran trader who at one time co-managed Steve Cohen’s legendary SAC Capital. "Astute investors don’t short momentum stocks as they climb purely on valuation because the market can stay irrational longer than an investor can stay solvent. However, once the momentum breaks and fundamental reality sets in, the shorts go after the equity like bees to honey."

Even though the IEA Executive Director Nobuo Tanaka said in the official release that the move was in response to a supply disruption because of Libya, traders speculated that President Obama was ultimately behind this decision because of hints that he has given earlier this year.

White House spokesman Jay Carney said the President may tap the SPR if necessary on June 8th. Obama first hinted at using this option in March just before oil hit its high for the year.

"It makes complete sense that they would do it at a time when crude prices were already moving lower in order to get the biggest bang for the buck," said Jim Iuorio, a trader with TJM Institutional Services. "That strategy is a classic central bank currency intervention move and it works…at least temporarily."

While they may admire the President’s trading acumen, the majority tend to disagree strongly that this will accomplish the goal of keeping gas prices for consumers low at the pump through the summer or the stated goal of capping crude on ongoing Libya supply disruptions.

"The release of oil from the SPR was utter and complete nonsense," said Dennis Gartman, long-time commodities trader and author of the daily The Gartman Letter. "Most of the SPR is low quality, heavy, sulfurous crude that no one wants. This was purely a political ploy."

The Libyan conflict has displaced 150 million barrels or 1.6 million barrels per day from global markets, according to Stratfor, a global intelligence research firm. None of that oil would have come to the United States, yet half (30 million barrels) of this coordinated international release is coming from America’s emergency reserve and headed for U.S. markets.

If there’s any lesson here, it pays to trade alongside President Obama. Back in March 2009, Obama made an unusual remark for a sitting President, saying that equities were a good deal based on earnings valuation. The bull market would begin that month.

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http://www.cnbc.com/id/43514254