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Jun 25 2011

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HEARD ON THE STREET: A Coalition Strike On Oil Prices

    By Liam Denning 
    A DOW JONES COLUMN 
 

Brent crude oil fell as much as 7.4% after the IEA announced plans Wednesday to release two million barrels of oil a day from emergency stocks in July, with the U.S. providing half of it.

The timing of the move has oil traders scratching their heads or tearing their hair out. Emergency stocks are kept for use during big supply disruptions. Yet the civil war in Libya has been raging for months. Brent peaked at almost $127 in early April and had since fallen almost 10% before Wednesday. Moreover, despite this month's acrimonious meeting of the Organization of Petroleum Exporting Countries ending with no increase in quotas, Saudi Arabia said it would increase output anyway. So why release barrels now?

But it is likely the IEA's move has been in the works for months. Back in February's monthly report, the IEA warned oil expenditures by developed economies could hit 4.7% of gross domestic product this year, the highest since 2008's 5.1%.

Back during the Gulf War crisis, the IEA only released stocks after Saudi Arabia had raised production and oil prices had started falling, points out David Kirsch, a director at consultancy PFC Energy. This time, besides Libya, Royal Dutch Shell 's warning earlier this month that it might not be able to meet contracted deliveries of Nigerian light, sweet crude in June and July due to violence may have provided a trigger for the IEA's action. Libya's output was also light, sweet crude, for which the market is tighter--one reason Brent crude trades at such steep premiums to other benchmarks.

Ultimately, conspiracy theories will swirl around any political intervention in the oil market. But given real disruption, the IEA can justify its action.

For whiplashed oil bulls, such details are almost beside the point. The salient point is that the IEA's move is at least partly motivated by economic fragility. Moreover, the chance of further releases is now another price-capping wild card for near-term forecasts, alongside OPEC infighting, Chinese monetary tightening and Greek solvency. This should serve as a warning for those foreseeing a second half spike in oil prices.

(Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-2801 or by email at liam.denning@wsj.com)

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25-06-11 0753GMT