IEA’s decision to add oil to global market comes under scrutiny

27 June 2011 22:04  [Source: ICIS news]

HOUSTON (ICIS)--The release of a 60m bbl of oil to the global market by the International Energy Agency (IEA) came too late and will have a questionable impact, an analyst said on Monday.

“The decisions by various government agencies in Europe and the US to do a coordinated release of crude oil from strategic petroleum reserves seems about two months too late,” said analyst Dan Lippe with Petral Worldwide.

The IEA announced on Thursday it would release 60m bbl to the market at a rate of 2m bbl per day. The US Strategic Petroleum Reserve (SPR) will provide half of the oil, 30m bbl, from its 727m bbl underground storage caverns.

Lippe said prices already began to weaken in early June after Saudi Arabia announced its intention to increase production rates to 10m bbl/day from its current 8.8m bbl/day starting in July.

“[This] is probably enough to replace production losses from Libya and Yemen,” Lippe said.

Before this formal announcement, Saudi Arabia already increased production some to replace the loss of oil from Libya.

Libya cut off oil exports beginning in February, removing about 132m bbl of high-quality crude from the market, according to the IEA. This propped up oil prices.

Stephen Jones, an analyst with Purvin & Gertz, said the purpose of the SPR is to cover for major supply interruptions, which would include the situation in Libya.

“Is the loss of Libyan production a major supply interruption? By some measure, yes,” Jones said.

In past years, the US SPR temporarily released oil to replace production losses in cases of natural disasters.

“When we had hurricane-related reductions in Gulf of Mexico production, crude oil was released from the SPR but was ‘loaned out’ and refiners had to repay the loan by diverting some of their future crude oil purchases to rebuild SPR inventory,” Lippe said.

The long term political and economical impact of the IEA’s decision will depend on the length of interruption of Libyan exports.

“Although there are huge uncertainties, analysts generally agree that Libyan supplies will largely remain off the market for the rest of 2011,” the agency said.

Jones said that by a quantitative analysis, 60m bbl is “not sustainable to cover a longer-term disruption - [it] just buys some time at best.”

Jones acknowledged that the high price of oil has been a threat to the economy, and Lippe agreed.

“[The administration of US President Barack Obama] is desperate to ‘do something’ for the economy,” Lippe said. “Lower oil prices have a similar impact as a tax cut.”

By: Sheena Martin
+1 713 525 2653

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