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By Robert Rapier on Sep 3, 2008 with no responses

SPR is Being Tapped

Tags: investing, SPR

In response to Hurricane Gustav and the oil production that was taken offline as a result, the federal government announced that 250,000 barrels of oil would be released from the Strategic Petroleum Reserve:

Oil prices drop as US opens reserve taps

LONDON (AFP) – Oil prices fell on Wednesday as the US government decided to release crude stocks from its strategic reserve after Hurricane Gustav halted energy production in the Gulf of Mexico.

“The release of the oil will prevent any shortage and that will, of course, help calm the market,” said Victor Shum, an analyst with energy consultancy Purvin and Gertz.

The United States announced late on Tuesday that it was releasing 250,000 barrels of oil from its strategic reserve to help cover lost production.

There was no oil production on Tuesday in the Gulf of Mexico region, where a quarter of US oil is normally produced, the US Department of the Interior said. Ninety-five percent of natural gas production was also offline.

The threat from Gustav had raised grim memories of the 2005 hurricanes Katrina and Rita which damaged or destroyed about 165 of around 4,000 oil platforms in the Gulf. Damage this time appeared to be much less severe.

This news is helping to put downward pressure on oil prices, already down almost 30% from the highs set just a couple of months ago.

Long-term, I certainly don’t believe the oil bull is dead, but a lot of people are learning a very hard lesson about commodities trading: You can go from rich to poor very quickly. I have heard some in the “peak oil now” camp argue that it is a no-brainer to invest in oil futures, because 5 years from now oil is going to be $400 a barrel. That may very well be true, but there will be a lot of ups and downs in the short-term that make the long-term strategy difficult to realize. Those who bought oil contracts at $147 and are still holding them now understand what I mean.