Update- June 2011 As forecast in the article below the IEA now intends releasing 60 million barrels. Unsurprisingly the announcement caught the market unawares. It has caused speculative dumping and has placed pressure on OPEC. Saudi Arabia, worried about a disgruntled populace, is unlikely to cut production. Read on from “Circumstances”
March 2011:- THE International Energy Agency (IEA) is likely to release emergency strategic oil stocks if a worsening Libyan and Middle Eastern oil crisis causes prices to spike towards the 2008 peak of around US$150 a barrel.
Rebels attempting to institute democracy in Libya are battling against the Gaddafi dictatorship which is re-gaining lost ground with its superior forces and armaments.
Libya produced 1.6 million barrels of crude oil a day in January. Although its normal production accounts for only 1.8 per cent of total world supplies of around 89 million barrels a day, the market is so concerned about any disruption that prices have spiralled upwards.
On Friday, Brent oil closed at US$116 a barrel, a premium of US$12 over the US$104 a barrel for West Texas Intermediate, whose price is lower because of sufficient stocks in the US.
Circumstances which encourage IEA to act
Officials of the IEA, which represents 28 industrialised countries, have broadly hinted that the organisation will act if necessary. There are huge stocks available and the clear message is that industries and consumers should not panic.
According to the agency’s statistics, oil stocks in IEA member countries totalled some 4.35 billion barrels at the end of August 2010. The breakdown of these inventories, including crude and oil products, was around 2.8 billion barrels held by industry and 1.55 billion in government strategic stockpiles.
China, India and several other Asian countries have also built up stockpiles in recent years.
In assessing the necessity to initiate coordinated action, the IEA considers multiple factors, the agency states in a paper. The decision depends on the expected duration and severity of the oil supply disruption, and also takes into account any additional oil which may be put on the market by producer countries.
The IEA has acted on two occasions to bring additional oil to the market through coordinated actions: in response to the 1991 Gulf War and the hurricanes in the Gulf of Mexico in 2005.
‘The IEA collective action successfully reinforced market functions to relax tightness and offset interruption in supply,’ the agency said.
Geopolitics and supply fears cause tension
The oil market is jittery because of the overall tightness in the market since the global economy recovered from the recession of 2009.
World oil supply rose by 500,000 million barrels a day in January to 88.5 million barrels, and total Middle East supplies amounted to 30 million barrels a day, or 37 per cent of the total.
Demand has been level pegging normal production, but would slide if much higher sustained oil prices caused the US, Europe, Japan and Asia to slip into renewed recession.
Such are the fears that the conflagration will broaden to Algeria and possibly Saudi Arabia‚ that Alan Duncan, International Development Minister in the British government, predicted that ‘in a worst-case scenario’ crude prices could top $200 and even rise to $250 a barrel.
Mr Duncan, a former oil trader, has been criticised for scare-mongering, although several oil traders have agreed with him.
Speculation and Investment extensive
Speculation has increased to record levels. The open interest on crude oil and futures on the New York Mercantile Exchange was at record levels of 2.94 million contracts of 1,000 barrels each at the beginning of March. Large speculators, according to the Commodity Futures Trading Commission, have net long, i.e. bull, positions of around 305,000 contracts equivalent to 305 million barrels, almost four days’ global demand.
Moreover, increasing flows of pension, bank and wealthy individual money into oil and other commodity exchange traded funds and indices contributed to the upsurge in oil prices from around US$40 a barrel at the end of 2008.
According to the IEA, the net notional value of these holdings amounted to a record $211.1 billion at the end of December 2010, with a sizeable proportion in crude oil and products.
IEA will catch speculators on wrong foot
In previous instances where the IEA has released stocks, it has acted to catch speculators on the wrong foot and cause a sharp price retreat.
‘Both consumers and producers have tools at hand to deliver adequate oil to the market,’ said the IEA in a statement a few days ago. ‘Producers hold ample spare capacity. The IEA is always ready to immediately activate its existing collective response mechanism when deemed necessary.
‘Collectively, the IEA members have 1.6 billion barrels of emergency oil stocks at their disposal, or in aggregate 145 days of import cover for IEA members,’ the latest statement said.