West taps oil reserves to boost economy; prices slump
Oil consumer nations on Thursday announced a surprise release from strategic government petroleum stockpiles in a bid to push down fuel prices and underpin the global economy.
The 28-member International Energy Agency said it would release 60 million barrels a day over an initial 30 days to fill the gap left by the disruption to Libya's output.
The United States will provide half the volumes from its huge 727-million barrel crude reserve, about 1.5 days of U.S. consumption, with Europe supplying 30 pct in crude and refined products and the rest from Pacific OECD nations.
The release, only the third in the IEA's 37-year history, is a blow for the Organization of the Petroleum Exporting Countries and in particular for its biggest producer, Saudi Arabia, a close U.S. ally.
Despite Saudi efforts, the producer cartel failed to raise output at a meeting on June 8 leaving Riyadh to pump more unilaterally.
Before the OPEC meeting Riyadh had discussed a crude swap with the United States that would have seen U.S. reserves supplied to Europe, but failed to reach agreement.
"The move is significant as it represents a reach by member countries for the remedy of last resort to high prices," said U.S. energy analyst John Kilduff at Again Capital.
"Clearly the energy price spike is being cited as the reason for the economic slowdown and this is reaction to that. The Libyan outage provides good cover."
OPEC member Libya was exporting about 1.2 million bpd before the rebellion that brought its oil industry to a standstill.
"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," said the IEA. Libya was likely to remain off the market for the rest of 2011, it said.
"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," the IEA said.
Price Impact Uncertain
Oil prices traded $7.07 a barrel lower for benchmark Brent crude at $107.14 and U.S. crude fell $4.68 a barrel to $91.73 a barrel.
With world oil stocks at comfortably high levels by historical standards, oil analysts were divided on whether prices would fall further or not.
"I think the IEA is trying to act like a central bank," said Dominick Chirichella at New York's Energy Management Institute. "I don't think anyone will be comfortable being long oil ... We may see (U.S.) oil trading in the $80s very soon."
But Carl Larry at Blue Ocean brokerage in New York said prices might not have much further to fall.
"This is an economic stimulus ... in oil dollars," said Larry. "On the other hand I think we have confirmed the bottom of the oil market here at $109 for Brent and $90 for WTI."
Departure For IEA
The decision appears to represent a departure for the IEA from previous emergency releases and will not go down well with OPEC.
In the 1990-1991 Gulf conflict when Iraq invaded Kuwait much larger volumes of crude were shut. When Hurricane Katrina in 2005 hit U.S. refineries the IEA release consisted mostly of European refined products to the United States.
"There is no reason to do this," said a senior Gulf Arab OPEC delegate.
"The market is not short of supply. Kuwait and the Saudi Arabia have been raising production but there have not been many buyers. The IEA is just playing politics with the U.S."
Leading U.S. oil companies appeared to share that view.
The American Petroleum Institute which represents Exxon and Chevron among others said the plan was "ill timed" and "makes little sense" because there was no supply emergency.
IEA Executive Director Nobuo Tanaka said the action was intended to work in tandem with Saudi Arabia and other Gulf Arab producers.
"Our stocks release is intended to complement the action of those key producers to fill the gap. Together producer and consumers will have taken concrete steps," Tanaka said.
The agency will review the need for a further release in a month.
"The IEA will continue to watch further developments and we will use the next 30 days to reassess the situation," said Tanaka.
[Source: By Muriel Boselli, Reuters, Paris, 23Jun11]
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