Thursday, June 23, 2011

Well ‘Why-EA’? Agency wilts as politicians win!

Earlier this afternoon, for only the third time in its history, the IEA asked its members to release an extra 60 million barrels of their oil stockpiles on to the world markets.

The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it has happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it is a significant event.

The impact of the move designed to stem the rise of crude prices was felt immediately. At 17:15GMT ICE Brent forward month futures contract was trading at US$108.45 down 4.99% or US$5.74 in intraday trading while the WTI contract fell 3.64% or US$3.51 to US$91.46.

Nearly half of the 60 million barrels would be released from the US government’s Strategic Petroleum Reserve (SPR). In relative terms, UK’s contribution would be three million barrels – which tells you which nation the IEA was mostly looking to. The agency’s executive director Nobuo Tanaka feels the move will contribute to “well-supplied markets” and ensure a soft landing for the world economy.

This begs the question if the market is “well-supplied” especially with overcapacity at Cushing (Stateside) why now? Why here? For starters, and as the Oilholic blogged earlier, some politicians like Senator Jeff Bingaman – a Democrat from New Mexico and chairman of the US Senate energy committee – have been clamouring for his country’s SPR to be raided to relieve price pressures since April.

OPEC’s shenanigans earlier this month gave them further ammunition amid concerns that the summer or “driving season” rise in US demand would cause prices to rise further still. That is despite the fact that the American market remains well supplied and largely unaffected by 132 million barrels of Libyan light sweet crude oil which the IEA reckons have disappeared from the market (until the end of May since the hostilities began).

Nonetheless, all this mega event does is add to the market fear and confirm that a perceptively short term problem is worsening! Long term hope remains that the Libyan supply gap would be plugged. Releasing portions of the SPRs would not alleviate market concerns and could even be a disincentive for the Saudis to pump more oil – although they made it blatantly obvious after the OPEC meeting deadlock on June 8 that they will up production. Now how they will react is anybody's guess?

Jason Schenker, President and Chief Economist of Prestige Economics, feels that while the decision is price bearish for crude oil in the immediate term, these measures are being implemented with the intent to stave off significantly higher prices in the near and medium term.

In a note to clients, Schenker notes: “The fact that the IEA had to go to these lengths in the second year of an expanding business cycle says something very bullish about crude oil prices in the medium and long term. The global economy is up against a wall in terms of receiving additional oil supplies to meet demand. Additional demand or supply disruption would have a massively bullish impact on prices. After all, releasing emergency inventories is a last resort.”

But must we resort to last resorts, just yet? While Sen. Bingaman would be happy, most in the market are worried. Some moan that Venezuelan and Iranian intransigence in Vienna brought this about. For what it is worth, the market trend was already bearish, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

Some for instance like Phil Flynn, analyst at PFG Best, think the IEA’s move was “the final nail in the coffin for the embattled oil markets.” Let’s see what the agency itself makes of its move 30 days from now when it reassesses the situation.

Those interested in the intricacies of this event would perhaps also like to know how the sale takes place but we only have the US example to go by. Last time it happened – under the Bush administration on September 6, 2005 – of the 30 million barrels made available, only 11 million were actually sold to five bidders by the US energy department. Nine of a total of 14 bidders were rejected, with deliveries commencing in the third week of the month. What the take-up would be in all IEA jurisdictions this time around remains to be seen.

Medium term price sentiments according to the Oilholic’s feedback have not materially altered and so they shouldn’t either. An average of five City forecasts sees Brent at US$113.50 in Q3 2011, US$112.50 in Q4 11 and US$115 in Q1 2012. Finally, most city forecasters, and to cite one, remain “marginally” bullish for 2012 though no one, this blogger including, sees a US$150 price over 2012.

Finally to all of the Oilholic's American readers concerned about the rising price of gas, spare a thought for some of us across the pond. OPEC’s research suggests (click graph above) that much higher taxes in most national jurisdictions in this part of the world means we pay way more than you guys. That is not changing any time soon. Releases of SPRs woould not meaningfully ease price pressures at the pump for us.

© Gaurav Sharma 2011. Photo: Gas Station, Sunnyvale, California, USA © Gaurav Sharma, April 2011. Graphics: Who gets what from a litre of Oil? © OPEC Secretariat, Vienna 2010.

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