U.S. to Release Oil Reserves in Coordinated Effort
The U.S. and the U.K. may agree to release crude from government held strategic reserves to bring down high oil prices. [1] Globally, oil prices have jumped since the beginning of the year because of rising tensions with Iran. High gasoline prices in the U.S. are pushing down demand and are becoming an increasingly important topic in the presidential election debate in the country. High oil prices increase the upstream earnings of oil majors like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), but impacts the downstream margins and retail volumes. However the increase in upstream earnings more than offsets the drop in downstream performance.
We have a $94.12 price estimate for Exxon, which is at a 10% premium to its current market price.
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Strategic release
The U.S. holds about 700 million barrels of crude oil in strategic reserves that are owned by the government. [2] Reuters reports that the U.S. government is working in coordination with the U.K. to release government reserves to bring down oil prices. [1] The government may also be pursuing talks with other countries like Japan to also contribute to the effort.
Last year, the U.S. along with the International Energy Agency (IEA) released reserves because of the conflict in Libya that cut off oil supplies from the African country. The IEA has kept away from the latest move by the U.S. government because of there has not been any supply discrepancies unlike in the Libyan crisis. The intervention in the oil markets could help lower prices.
High oil prices through 2011 helped oil companies to increase their upstream revenues and earnings. However high prices started putting a pressure on downstream margins and sales volumes by Q3. MasterCard data reported that gasoline sales declined by 7% in the week ending on March 9th.
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