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No need for more IEA oil reserves yet
Release would be more logical later this year than now; OPEC says release had no impact, IEA says it did; OPEC and IEA see supply gap for rest of this year
July 19, 2011 9:17 by Eva Fernandes
There is no sign yet of the kind of shortage to mandate another dip into the West’s emergency oil reserves when a 30-day deadline for assessing the impact of a first release expires at the end of this week, traders and analysts say.
And now the market has learnt to brace for the unexpected, it would take an even bigger shock than last month’s nearly 60 million-barrel supply injection to have a significant impact on prices of more than $116 a barrel for Brent crude.
For another International Energy Agency release to take place, it would have to be endorsed by all 28 members of the energy consumer body. Germany and Italy are likely to resist any plans for a second release for now, a French government source told Reuters last week.
Analysts from across the producer-consumer divide agree that does not mean another release will not happen this year. Some do not even rule out unilateral action by top oil consumer the United States, which provided 30 million barrels of the June 23 release.
“The IEA will undoubtedly repeat the release of oil from inventory in the last quarter of 2011 but probably not again this summer,” said Sadad al-Husseini, an oil analyst and former top official at state oil giant Saudi Aramco.
“We don’t see a strong response to the incremental Saudi oil offerings and that must mean that the market cannot absorb any additional oil supplies at the current prices.
“By year-end, the situation will be different. This is because supplies will again be lagging demand and will remain so over the next two years.”
The IEA’s announcement of emergency supplies in June followed the failure of leading OPEC member Saudi Arabia, traditionally a price moderate and U.S. ally, to convince the group to increase supplies.
In defiance of the Organization of the Petroleum Exporting Countries’ refusal to back an output rise, Saudi Arabia independently increased its output, which hit 9.8 million barrels per day (bpd) in June, a senior Gulf OPEC delegate told Reuters.
Not all of that will make it to international markets.
The IEA in a monthly report last week made a case both for more action and inaction, analysts said.
It noted Saudi Arabia was this year burning record amounts of oil, averaging nearly 600,000 bpd, to meet domestic demand for power.
In common with a report from OPEC, the IEA found a gap of around one million bpd between expected OPEC production and anticipated demand for its oil.
But it also said the June release had helped to narrow a pricing gap between high-quality, light, easy-to-refine crude and heavier grades, even if the overall oil price has bounced to higher levels than before the IEA supply injection.
“They have given themselves justification to do just about anything they want. I’m sure it will be a lively debate internally,” said Mike Wittner, an analyst at Societe Generale, who used to work for the IEA.
For him the most likely outcome of this week’s review would be a statement the IEA would continue to monitor the situation.
“It’s hard to pull the trigger again on another release when you don’t know how much of what’s already been released has been taken up,” he said.
The IEA said slightly less than the 60 million barrels initially announced would be released, but so far the take-up rate had been higher than after its previous release in 2005 when Hurricane Katrina devastated oil infrastructure in the U.S. Gulf of Mexico.
To date, the only other release in the 37-year history of the IEA was at the time of the first Gulf War, while the United States on rare occasions has independently released oil from its Strategic Petroleum Reserve.
This time, all of the 30 million barrels made available by the United States has been sold into the market, but a German government official, asked about a possible further release, noted not all of the reserves had been “fully utilised”.
The IEA’s report said inventory levels had dropped, taking onshore stocks at the end of June “close to five-year average levels” after many months of being substantially higher than historical levels.
That does not suggest an immediate crisis, but some analysts saw an argument for pre-emptive action before the peak demand final quarter of the year, especially as incremental Saudi Arabian oil tends to be heavy and unsuitable for some refiners.
“To get the crude out to the market in September, they would have to act soon,” said Bob McNally, a former White House energy official who runs energy consulting firm Rapidan Group, which accurately predicted the first measure.
He took the view U.S. officials were likely to seriously consider pushing the IEA to release more oil.
“The odds of another release are much higher than the oil market expects,” he said. “While it’s not a foregone conclusion, it’s a good possibility.”
The United States is seen as particularly keen for lower oil prices in the run-up to a presidential election and when the economy is fragile.
Just as Saudi Arabia might have been more comfortable acting with the backing of OPEC as a whole, it would be more convenient for the United States to work within the IEA framework.
But in Europe, high levels of tax mean consumers are more resigned to high prices and less sensitive to rises on international markets.
The IEA has said its reserves release is primarily designed to meet the supply shortfall left by the loss of Libyan barrels to civil war, although it has also mentioned a need to protect the economy.
Only output disruption from another significant oil producer would warrant another release at this point, said Emmanuel Painchault, analyst with Edmond de Rothschild Asset Management.
“There are enough commercial stocks around and even though we expect them to fall in the coming months, this does not justify exaggerated interventionism,” he said.
If the IEA’s aim is to lower prices to protect the world economic health, analysts said it needs to do much more — and even then, market reaction would be very hard to predict.
“I think that the IEA has now lost the initiative in the market. It would have had a much better chance of holding the oil price lower had it, for example, released more oil the following week,” said Chris Weafer, chief strategist at Uralsib in Moscow.
Oil prices initially dropped around 6 percent , but rebounded swiftly.
“The first exercise has shown us that to achieve a significant and sustained fall in the oil price a much bigger intervention by the IEA is required,” said Neil Atkinson of Datamonitor.
“Also, releasing crude oil is only part of the answer. It is products that count for end-users and unless crude is refined it is merely transferred from one stock holder to another.” (Additional reporting by Joshua Schneyer in New York)
By Barbara Lewis and Muriel Boselli