Sam Fletcher
OGJ Senior Writer
The International Energy Agency’s decision to release 60 million bbl of crude and petroleum products from the strategic petroleum reserves is “the equivalent of QE2 in the oil market,” said Barclays Capital analysts.
QE2, the second phase of the Federal Reserve Bank's quantitative easing program that critics claim failed to stimulate the US economy, expires this month. Oil prices may decline in the third quarter due to IEA’s aggressive action but may surge again going into 2012, analysts said.
Weeks before the June 8 meeting of the Organization of the Petroleum Exporting Countries, IEA governors said they were “prepared to consider using all tools” at their disposal if OPEC failed to increase production to reduce prices. “However, OPEC’s meeting broke up without any consensus or decision. This left the IEA hostage to its own fortune, instigating the [strategic reserves] release decision,” said Paul Horsnell at Barclays Capital in London.
Despite the fig leaf excuse of replacing crude supplies lost in the 4-month revolution in Libya, many political and industry observers accuse President Barack Obama and IEA of using emergency crude supplies to manipulate energy prices, a purpose for which it was not intended.
Many question the necessity of dumping so much oil into already declining markets. “Oil prices have been retreating, but not fast enough to suit policymakers,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC. Moreover, he said, “Saudi output is rising in June, with more estimated to be coming in July, and so there has been some concern that the IEA release might undermine their efforts.”
The US plans to release 30 million bbl of crude from Gulf Coast Strategic Petroleum Reserve storage, but commercial Gulf Coast storage is near record levels with “only about 17 million bbl of crude storage space left,” said Olivier Jakob at Petromatrix in Zug, Switzerland. There also is not much storage available in the Midwest, including the key exchange point of Cushing, Okla.
Wisdom questioned
Many also question the long-term wisdom of IEA’s move. “No doubt, the availability of crude should improve materially at least in parts of the third quarter, thereby covering for a large part of the [commercial] stock draws implied in our and consensus balances,” said analysts with Barclays Capital Commodity Research team. It is already having a negative effect on prices and curve shapes.
However, they said, “The reality remains that the current market is still grappling with a structural change that has effectively resulted in the gain of some 5 years of oil demand in 1 year” with the economic growth of developing countries.
IEA predicted 2 years ago that 2007 high demand levels would not be matched until 2012, in the case of high gross domestic product or 2014 if GDP was low. “Not only did we surpass 2007 peaks in 2010, we added a further 1.7 million b/d, equivalent to a year’s annual [demand] growth level,” said Barclays Capital analysts. “Such a uniformly strong demand backdrop pitted against a non-OPEC supply picture, which is still struggling at large beyond a few pockets of strength, requires a constructive consumer-producer relationship at the very least to address the long-term issues of this growing mismatch and its impact on prices. Latent threats in statements, public retaliation through the media, encroaching on each other’s duties and roles in the market simply do not bode well for the long-term prospects of stability in the oil market.”
As a result, they said, “The IEA has done exactly what it did not want to do—its actions could ultimately dry up OPEC volumes, warranting even larger stock draws once the SPR release stops. Rather than letting the market decide on long-term resource allocation (e.g. higher oil prices eventually encouraging the switch to cheaper fuels), the IEA’s intervention is likely to do little to address the long-term issues of the market, instead keeping oil demand high and discouraging substitution as a result.”
(Online June 28, 2011; author’s e-mail: [email protected])
Hess Corp.
Federal Reserve Bank of Dallas
