World crude oil market has been rocked by the surprise announcement of the International Energy Agency (IEA) to release 60 million barrels of oil from member countries' strategic petroleum reserves (SPR). The US led the effort by chipping in 50% of the planned release, while Japan, Germany, France, Spain and Italy are providing most of the rest.
Questionable Timing
This kind of coordinated sale from the IEA has only occurred twice before on a supply emergency basis – 1991 Persian Gulf War, and Hurricane Katrina in 2005. This time around, the "supply emergency" cited was the disruption stemming from the conflict in Libya, which started about four months ago.
So just based on face value, the timing seems questionable, and we have not even got into the philosophical debate as to whether SPR should be used as a market price equilibrium tool, which was briefly discussed in my previous article, but will not be the focus of this discussion.
What Supply Emergency?
Unlike the two previous releases by the IEA, currently there's no similar crude supply shortage situation. Libya and Yemen are the two biggest concerns that the unrest could destabilize larger oil-producing countries in the region. However, these two nations produce less than 4% of the world's oil needs, and Saudi Arabia and others have boosted output to make up for much of the shortfall.
In the U.S., crude inventory remains high at 363.8 million barrels as of June 17, above the average range, and there's no dire shortage in products either (See Chart Below).
Outside of the U.S., stocks are building as well. From Oil Daily dated June 21:
"OECD commercial inventories for crude and products rose again in May, which came on the heels of an almost 1 million b/d jump in April….At 2.656 billion barrels, OECD inventories provide a solid cushion…"
If there such a "tight" European crude market caused by Libyan disruption as many, including the IEA, cited, then there should not be such a build in inventories in OECD.
Other Possible Incentives
Others believe the move by the IEA and the U.S. is to
- Curb high consumer gasoline prices
- Send a message to market speculators
- Counter the failed production increase at OPEC meeting in Vienna on June 8
- Act as stimulus amid faltering global economy by lowering the commodity prices
Already In Progress - Curing High Prices
Regarding the high gasoline and oil prices, the market is already in the process of taking care of that.
Crude oil was already collapsing to around $92 for WTI and roughly $112 for Brent, during the past week or so, mostly related to the deepening debt crisis in Greece, Europe, and a stalled U.S. economy with poor employment, housing reports, and a dried-up QE2.
Meanwhile, the robust China energy demand as touted by many Wall Street Banks is fading fast as China is still battling inflation, suggesting more monetary tightening which could ultimately slow down demand for oil.