“The International Energy Agency (IEA) rarely intervenes in oil markets,” says The Economist. “The rich country energy-club keeps its vast reserves of oil to tackle emergencies caused by unforeseen supply disruptions.” So the recent announcement that IEA members will release 60 million barrels of crude over the next 30 days came as a surprise; this is only the third time stockpiles have been tapped, after supply shocks during the 1990-1991 Gulf War and Hurricane Katrina in 2005.
“How big a deal is this?” asks Capital Economics. “The $6 fall in the price of Brent on Thursday certainly suggests that the announcement was significant.” The IEA has the option of continuing beyond 30 days – and with almost 1.6 billion barrels in storage, in theory it could supply the proposed two million barrels per day for over two years. But this option has always been available, so it seems “naïve” to assume the outlook for oil has changed greatly. The fundamental supply and demand balance should continue to be much more important.
So why release the oil now? The release may be an “important precedent” that creates “a bearish wildcard for some time to come”, argues Société Générale. However, caution is warranted – especially when analysing what drove the IEA to take this step. “Officially, the reason is to make up for lost Libyan production and exports – but we don’t believe it.”
After all, the Libyan war has been raging for three months and if there was a physical shortage of light, sweet crude – which reports suggest is not the case – the IEA could have acted months ago. “The key factor behind the release, in our view, is politics”: populist gestures in the US and Europe, an attempt to help the faltering economic recovery and perhaps flush speculators from the oil markets.
This suggests that “politicians are getting worryingly desperate”, adds the Lex column in the Financial Times. “Having used every monetary and fiscal tool at their disposal since the crisis to no avail, the risk is that developed-world politicians have become ever more populist in their attempts to keep their economies ticking over.” Their latest move seems unlikely to deliver better results.
Yes, for now it has produced a sharp drop in the spot price, says Tom McClellan of the McClellan Market Report. But this means that oil for delivery in future months trades at higher prices than oil for delivery now (a contango in futures terminology). “Big contangos create an incentive to take away short-term supply, because a trader can make money buying up the product on the spot market and storing it for future sale at a higher price.” Hence any supply increase may be short-lived.
As far as unforeseen consequences are concerned, the implications are “rather worrisome” looking further out, says Gregor Macdonald on Gregor.us. First, the release implies Saudi Arabia cannot boost supply further – as was promised when the Libyan problem began.
Second, it re-emphasises the fundamental problem of “structurally constrained supply” from all sources – which will be taken as bullish for oil once the short-term impact wears off. And thirdly, if the IEA persists in trying to knock down the spot price, it threatens the development of new unconventional supplies (such as tar sands, deepwater oil and shale oil) that require prices above $80 a barrel to make them worthwhile. So the IEA’s actions will probably do nothing to moderate demand and boost supply, and may even cause harm – whereas prices, left alone, will deliver a clear signal.
“The best solution to a high oil price is a high oil price,” concludes The Economist. “Tinkering with that equation is rarely a good idea.”