Industrialized members of IEA, the energy policy arm of the OECD, orchestrated oil releases from their governments’ petroleum reserves to talk down the price of oil. The declared objective is to reduce oil prices through repeated orderly releases of the strategic oil stocks during a period when the world economy is going through a soft patch. The first round involved the release of about 60 million barrels (equivalent to two-third of world’s daily oil consumption), of which 30 million barrels were released by the United States. This largest oil-consuming country usually releases oil from its SPR during emergencies, as happened in the 1991Gulf war and the 2005 hurricane Katrina. But this time the objective is price manipulation.
The interesting thing about the current releases is that they were oversubscribed and bought quickly by commercial companies, an activity that is limited by the cost of commercial storage. But the more interesting about this oversubscription is that the released oil went from government storage to commercial storage without going to refiners because there was no shortage in supply of oil in the markets.
The first lesson we learned from these orchestrated releases is that oil designed to be used during emergencies that caused shortages cannot be used as a political tool to affect oil prices during normal supply periods. The second lesson we learned is that the SPR releases cannot be used as a tool to kill speculations. Today, a good portion of the 2.1% increase in oil price was due to speculative activity invoked by enthusiasm about the jobs market prospect in the United States and the drawdown in this country's oil inventories. As Gregory Meyer wrote in FT.Com the stocks release’s outcome is “a government-created trading opportunity for oil desks at Wall Street banks, commodity merchants and energy companies” . The third lesson is that oil releases may change the spreads between oil benchmarks. The June 2011 releases slighly favored WTI over Brent in the light, sweet spread. The fourth lesson is that oil releases in regions like Japan and Korea will not help replace lost Libyan oil destined to Western Europe because it went into commercial storage in the same source of origin. The fifth lesson is that oil stocks releases create forces that help defeat the objective that motivates the releases. The current releases change the backwardation in the market, which suggests a price topping is at hand caused by the loss of the Libyan oil, to contango which signals that higher oil prices are looming on the horizon, dooming the objective for the releases .
Having said all the above, what’s the true cause of higher oil prices that are happening despite the slowdown in the world economy? Geopolitical reasons manifested in the Arab uprising, particularly in Libya, are the short-run catalyst for the recent increases in oil prices. Moreover, the weakening in the U.S, dollar has also been a recurrent cause for higher oil prices. But the underlying reasons are represented in improving fundamentals for the oil market. It seems that oil prices are predicting a strengthening in economic recovery in the United States and other regions in the foreseeable future despite the current weakness in the world largest economy. Is it possible the growing oil demand in China, India and Latin American is more than making up for the weakness in the United states? Overall world demand is growing. Both the U.S. Energy Information Administration (EIA) and the Organization of Petroleum Exporting Countries (OPEC) forecast that the world oil demand will increase to record levels this year.
Is the Peak Oil Theory gaining credibility? This is a debatable issue. Could oil prices be predicting higher inflation in the near term? Possibly, but I am not sure about that. Is the oil market anticipating a QE3 soon in order to pass the current soft patch? Very likely!
In conclusion, persistent drops in oil prices cannot be engendered by releases from government oil stocks which are designed to deal with oil security and not oil price patterns. These persistent changes are prerogatives of OPEC and the oil market fundamentals and not the purview of the IEA’s strategic oil stocks. These releases cannot also overpower oil speculators.
Today’s 2.1% increase in oil prices sends IEA a strong message: Give up your planned orderly releases of strategic oil stocks. They are not successful!
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