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Gartman: Government must tap the SPR right now

Talking Numbers

Dennis Gartman says the government can turn a huge profit and bring down energy costs by selling a portion of the Strategic Petroleum Reserve and taking advantage of the futures markets' prices.

Dennis Gartman, founder and publisher of The Gartman Letter, has a plan that could net the federal government billions of dollars and lower oil prices while not threatening the long-term strategic oil supply.

For nearly four decades, the US government has been storing millions of barrels of oil along the Gulf Coast. The Strategic Petroleum Reserve (SPR) is now made up of nearly 700 million barrels of oil worth approximately $73.2 billion.

Meanwhile, in the oil markets, contracts on West Texas Intermediate Oil for September 2013 delivery are trading around $105 per barrel. But, for September 2014 delivery, that contract trades slightly above $93, a $12 discount. When contracts for a future date trade at a discount to near-date contracts, it’s called backwardation.

And, it’s not just one year’s worth of contracts. Looking at every delivery date for the next eight years, far-dated contracts trade at discounts to nearer-dated contracts at almost every point. Its lowest point is December 2018, where contracts are down near $80 per barrel, a $25 discount to the today’s oil prices. [See chart below.]

View photo

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Crude oil contracts (by delivery date)

You would think that a far-dated contract would be higher than a near-dated one because of the storage costs of oil. However, there can be a few reasons why prices for a far-dated contract would trade for less than a near-dated one. One might be risk, with sellers offering a discount to attract buyers worried about uncertain future oil prices. Another reason is simply near-term demand, where more oil is needed as soon as possible.

And there’s something Dennis Gartman believes the government can do to slake the markets’ thirst for oil now and flatten the spread between near-dated and far-dated oil, all while bringing in millions – if not billions – of dollars in to the US Treasury.

Gartman’s plan is simple: sell a portion of the SPR into market while buying those barrels back cheaper in the futures or forwards markets for a later delivery date.

“They’d earn a huge profit for the public because they own this crude oil that was bought back during the Bush Administration $70 cheaper than where it is right now,” says Gartman. “To be able to replace it at $10 or $15 less and guarantee that you’re going to get it to me is an absolute no-brainer.”

To hear Gartman discuss more details of his plan and what obstacles it faces, watch the video above.

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