By Robert Sullivan – Exclusive to Oil Investing News
The release of 60 million barrels of oil by the International Energy Agency (IEA) from its strategic petroleum reserves (SPR) last week had an immediate impact on oil markets, shaving close to 5 percent off of West Texas Intermediate (WTI) and Brent crude prices and sending both to 4-month lows. WTI continued to slip on Monday, briefly dipping below $90 per barrel for the first time since March, before settling at $90.61 per barrel.
For the IEA and its member states, the abrupt drop in prices played out perfectly and in the short-term should ease some of the pressure that has been weighing down on developed economies since the beginning of the year. What is less certain, however, is what the long-term consequences on oil price stability will be.
OPEC: IEA ‘violating principles’
The announcement on June 23 marked just the third time the IEA has tapped its SPR, the other occasions being Iraq’s invasion of Kuwait in 1990 and after hurricane Katrina in 2005. Coming just two weeks after OPEC failed to reach an agreement over increasing production on June 8 in Vienna, the move was slammed by the current president of OPEC, Iranian Oil Minister Mohammad Aliabadi, who accused the IEA of violating ‘principles’ that dictate when member states should access emergency reserves.
The IEA cited the disruption in supply from Libya as one of the primary reasons for needing to tap into the SPR, but the 1.5 million barrels of Libyan oil missing from export markets represents just 1 percent of global demand, which now stands at 89.3 million barrels per day. And although a majority of this oil goes to European markets, only 14 percent of the reserves are held by European member states. The United States, on the other hand, holds 56 percent of the SPR and are releasing half of the total 60 million barrels, but import only 3 percent of Libya’s oil.
This has prompted many energy analysts to echo criticisms similar to OPEC’s, and some view the move by the IEA as an attempt to step in to the market and force down oil prices after the OPEC discussions failed, rather than a response to a legitimate supply emergency. Even with the temporary injection of emergency oil into global markets, 60 million barrels is a drop in the ocean over the long-term and OPEC would still need to boost their output in order to keep prices from turning upwards again.
Saudis left in a tight spot
Saudi Arabia favours a lower price in order to protect the economic viability of their oil industry, but having failed to deliver in Vienna, their task may now be much more difficult as tension builds between OPEC and the IEA. Without a consensus on output, members can now effectively produce as much as they wish until their next policy meeting on production in December. Saudi Arabia has stated that they would unilaterally increase output to meet any rise in demand, but they will also be aware of the threat that may pose towards widening already emerging fractures within OPEC.
Having made this pledge to meet any growth in demand, the Saudis will no doubt be slightly irked by the move from the IEA, which should not only increase resistance among the Iran-led bloc within OPEC opposed to production increases, but is also an unwelcome shock at a time when they are plowing money into projects in order to ramp up their output. “The use of SPR”, notes British bank Barclays, “particularly when Saudi Arabia restated its commitment to supply customers with the crude they need, sends the wrong signal.”
“The single biggest risk [on the oil price upside] is that there is a war of attrition between OPEC and the IEA which goes on for a long time and leads nowhere…the biggest single risk [on the down side] is there is overshooting, that they don’t trust each other, both say they will produce more, both do produce more and all of a sudden prices go to lower levels and the OPEC countries breach their discipline.”