Russia's Finance Minister Alexei Kudrin said back in April that oil is headed to $60 in 2012 and so far he is being proven correct. Kudrin told a press briefing in Washington, D.C., in April. The price will probably fall to $60 a barrel in the next two years and stay at that level for about six months, he said, reiterating a forecast he made a year ago.
Obama Taps Petroleum Reserve. Consider This Q.E. 3
Jun. 23 2011 - 11:22 am
Today the International Energy Agency announced that it would release 60 million barrels of oil from global stockpiles. More than half of that will come from the U.S. Strategic Petroleum Reserve.
Crude oil prices and shares of oil companies plunged on the news, with Brent crude down more than $6 to $107 per barrel and West Texas Intermediate off $5 to $90. Shares of ExxonMobil, Chevron and Occidental Petroleum were all down 3% in mid-morning trading. The Dow was down 220 points.
The timing of this move comes just days ahead of the end of the Federal Reserve’s second quantitative easing program. In the absence of continued Fed buying of Treasuries, and the liquidity it adds to the financial markets, moving to reduce oil prices will be another helping hand to the U.S. economy. Knocking $20 a barrel off oil prices would reduce America’s annual oil spend by some $150 billion.
In a release this morning explaining the move, the IEA said the releases would amount to 2 million barrels per day. The IEA said the intent is to replace Libyan crude missing from the market, adding that it said there is increasing likelihood of summer oil supply shortfalls, especially in China, where petroleum demand is up 9% over last year and chronic electric power shortages have forced Chinese to turn to diesel generators. Some economists have predicted that shortages this summer could drive crude up to record highs. (See: Could We See A Summer Oil Shortage? This Economist Says Yes. )
The coordinated nature of this move indicates that planning has been underway for some time. Last week came the revelations that Saudi Arabia had in the weeks running up to the recent contentious OPEC been in secret talks with the Obama administration to balance Libyan outages by swapping light crude out of the SPR in exchange for cut rate Saudi heavy crude. The light crude released into the U.S. market by the SPR will free up crude for delivery elsewhere in the world.
At the OPEC meeting, the Saudis said that they intended to add volumes to the market, unilaterally if need be, over the objections of members like Iran and Venezuela. (See: Saudi Bid for QE3 Quashed By OPEC Discord).
Yesterday it was revealed that the Saudis seemed prepared to flood the market with oil, in part to put the screws to arch-rival Iran. (See: Saudis Set To Bankrupt Iran With Flood Of Oil.) With Iran inching ever closer to succeeding in its nuclear weapons ambitions, the U.S. and Saudis will necessarily be looking at all options short of outright military action to bleed the mullahs’ power. The Saudis have reportedly for months been working to increase their oil trade with China, in order to reduce Chinese reliance on Iranian crude.
A thought: world markets should be seriously disturbed that this emergency extra oil supply is coming out of government stockpiles rather than from the pumps of OPEC nations. The Saudis talk a good talk about being able to dramatically boost their output by as much as 4 million bpd if need be. If that’s the case, then why didn’t they? And what happens after this initial 30-day release period is over? There’s plenty more oil in the SPR–more than 700 million barrels–and the administration says it might extend the releases. But for how long? Eventually the stockpiles need to be replaced by newly pumped crude. Maybe Libya’s production will be back on line by then. If not, and if new supplies don’t materialize, the only thing that will keep prices from shooting back up will be the demand destruction that comes with a recession.
The IEA also released a surprisingly insightful Q&A about the release with some interesting insights to the process.
For easier reading, I’ve cut and pasted them here:
How many times has the IEA undertaken such a “collective action”? When was the last time?
On a global scale, this is the third time IEA member-country stocks have been used. IEA member countries released oil stocks in 2005, after Hurricane Katrina damaged offshore oil rigs, pipelines and oil and gas refineries in the Gulf of Mexico. The only other occasion IEA member countries mandated a stock release was at the time of Iraq’s invasion of Kuwait in 1990/1991.
How exactly will stocks be made available to the market in each of your member countries? What mechanism is used?
Member countries have different stockholding systems. Some have large reserves of public stocks, like the US, Japan and Germany, which can be offered to the market through loans or sales. Other countries have sizeable stockholding obligations on commercial oil industry operators which can be lowered in order to make these volumes freely available to the market. In some instances, a combination of public stocks and reduced obligation on industry is used, and it would be up to each country to decide how make additional oil available to the market. Finally, stocks can be in the form of crude oil of various grades, products or a mixture of the two.
How much time will it take for these stocks to become available?
Oil supplies from IEA member countries should begin hitting the market around the end of next week.
How much oil will each country release? Will each country release the same proportional amount, or will some countries do more? How is that decision made?
Country shares are based on their proportionate share of total IEA oil consumption so larger oil-consuming countries obviously have a bigger share in the overall release. In this case, all IEA countries holding strategic stocks and representing more than 1% of IEA final oil consumption are participating. It is expected that North America will release 50 percent of the total, with European countries releasing some 30 percent and Asian countries providing the remaining 20 percent. The IEA will produce a tally once it has a clear indication of the types of oil that each country will make available.
Has the IEA consulted with OPEC or Saudi Arabia on this decision? Would this IEA action not discourage Saudi Arabia and other willing OPEC members from increasing oil production?
The IEA and its member countries have been in close contact with key oil producing countries, and in particularly with Saudi Arabia, which holds the lion’s share of OPEC’s spare capacity. The IEA welcomes the announcement made by Saudi Arabia that it intends to make incremental oil available to the market. However it will take time for these incremental barrels to be produced and shipped to consuming markets; the use of IEA strategic stocks now will help bridge the gap until these new supplies are available. Producers and consumers have a common interest in stabilising oil markets. This point has been highlighted many times before, and is a reason for the IEA’s close liaison with key oil producing countries at all times.
I thought the IEA only does this for supply disruptions in excess of 7%. The 1.5 million-barrels-a-day disruption from Libya doesn’t seem all that much, given that global demand is around 88 mb/d, so why go to all the trouble?
As far back as 1984, IEA member countries understood that a disruption of a much smaller scale than 7% could cause significant economic damage, and thus they adopted more flexible response measures. The two previous emergency IEA actions, in 1991 and 2005, each accounted for less than 7% of world demand. Particularly in a tightening market such as the one we see currently, a relatively small disruption can have a significant impact on the market.
If the disruption from Libya is 1.5 million barrels per day, why are the IEA member countries releasing 2 million barrels per day?
By the end of May the Libyan crisis had removed 132 million barrels of crude from the market. Commercial stocks in the OECD countries have tightened as a result. Because crude demand peaks during the summer season in the Northern Hemisphere, we estimate that preventing further market tightening in the third quarter will require 2 million barrels per day of additional supply. Our action aims to provide market liquidity until incremental production comes to the market.
Libyan supplies have been off the market since February. Why are you only doing this now?
The IEA is prepared to act when there is a significant supply disruption or an imminent threat thereof. Since the Libyan crisis began, the market has focused on the potential for further tightening in both OECD industry stocks and OPEC spare capacity. The onset of the Libyan crisis fortuitously coincided with the peak of the European refinery outages, primarily linked to seasonal maintenance work, and thus lower demand for crude oil. Now, heading into the “driving season” in the Northern Hemisphere, demand for crude will rise as refiners seek to replenish product stocks ahead of rising transport fuel demand. This seasonal increase in demand, combined with OPEC¹s announcement at their 8 June meeting not to increase production to fill the gap with the necessary additional supplies, represents an imminent risk, which is why the IEA has chosen to take decisive action now.
Are IEA countries not putting at risk their capacity to react to more serious oil disruptions that may happen in the coming months considering geopolitical uncertainties in MENA countries?
No; IEA countries benefit from a very large safety net with their stocks: Total IEA stocks amount to more than 4 billion barrels, of which 1.6 billion are public stocks held exclusively for emergency purposes. This is equivalent to 146 days of net imports. So even after this 60-million-barrel collective action, all participating countries’ stocks will remain above 90 days of their net oil imports.
Several analysts say this is only likely to have a short-term effect on the market, and that prices will be higher in a month’s time. What’s your response? Will you extend this by 30 days? How will you decide?
Markets move based on today’s fundamentals and expectations of future supply and demand. The coming months, as we head into the driving season, would likely see the impact of the Libyan crisis felt most keenly; this is why the IEA is acting now. Some producer countries have announced their intentions to raise production, but it takes time for these incremental barrels to be produced and shipped to consuming markets. The use of IEA strategic stocks now will help bridge the gap until these new supplies are available. The IEA will continue to monitor the situation. If supply remains disrupted and markets remain tight in the future, the IEA does not exclude another decision to make additional supplies available to the market.
Isn’t the IEA effectively doing this to counter high prices and in that sense isn’t this fundamentally different from a traditional release in response to a supply disruption? Doesn’t this therefore set a bad precedent, by making the IEA a market manipulator?
The IEA is prepared to act when there is a significant supply disruption or an imminent threat thereof. Since the Libyan crisis began, the market has focused on the potential for further tightening in both OECD industry stocks and OPEC spare capacity, and we are now heading into the driving season in the Northern Hemisphere, which will witness an increase in demand for motor fuels. Refiners’ demand for crude oil is also rising, as plants typically come out of seasonal maintenance and begin ramping up runs to meet peak demand. This action is not about price but rather about ensuring an adequately supplied market to protect the world economy from unnecessary damage when it is in a fragile state.