Pakistan Today

Oil release a game changer despite price bounce

It might not sound like much of a victory. The United States and other oil-consuming countries release emergency stocks of oil to put a lid on prices. The result: crude prices in London rise by $1 since the program began, three months ago.
But many oil experts say the strategic releases — just the third-ever by a group of consumer countries — were a major success. Not only did they likely avert a further rise in oil prices during the peak U.S. driving season, but they set a precedent for consuming countries to keep bullish oil speculators in check.
“The releases completely changed the psychology of the oil market,” said Amy Jaffe, an energy policy expert at Rice University’s Baker Institute in Houston.
“The move worked, as it has in the past, because speculators now have to worry that extra oil may come if prices reach a certain level. It showed they are willing to use the strategic reserves.”
The programme to release 60 million barrels by the 28-nation International Energy Agency, which formally ended on Thursday, was first announced on June 23, when it set off an immediate drop of $7 a barrel in Brent crude prices.
The program, led by the US government, was controversial, with lots of oil market players deriding it as a political move to appease testy consumers, after US gasoline prices rose to near $4.00 a gallon in May. IEA’s extra oil supplies may have helped accelerate a 22 percent slide in US oil prices from 30-month highs near $115 in early May. US crude traded below $90 on Friday.
While European benchmark Brent crude has bounced back to its June price levels, it has not come anywhere near a high of $127 a barrel reached in April, a price some economists warned could tip major economies back into recession.
The IEA releases came in response to surging oil prices and supply disruptions in war-torn Libya. As Libya starts to resume output following the toppling of Muammar Gaddafi’s regime, the IEA says it sees no need to release more oil for now.
DEPARTURE FROM BUSH POLICY:
Although the United States imports little Libyan oil, it contributed more than half of the strategic oil released, in a sharp departure from Bush administration policy, which abhorred using the 727 million barrel Strategic Petroleum Reserve (SPR) for anything but a major war or hurricane.
The Bush administration, for instance, never tapped SPR crude when the oil sector of Venezuela, a top US supplier that pumps more crude than Libya, was crippled in late 2002 and early 2003 by a strike. The IEA also coordinated closely with Saudi Arabia, which has lifted its own output by some 900,000 barrels a day since May, according to Gulf sources.
“It’s pretty clear that things would have been worse without the releases,” said Edward Morse, head of commodities research at Citigroup in New York. “The supplies freed up oil that would have moved to the United States Northeast, instead sending it to Europe or Asia.”
To be sure, economic malaise has also contributed to cooling oil prices, as US job growth stalled in August, manufacturing slowed worldwide, and Europe’s economies faced debt crises. The IEA’s extra oil was less than a day’s worth of global supply, and less than a fourth of the crude that Libya stopped producing since February. The country’s normal 1.6 million barrels a day (bpd) ground to a halt during a civil war, with most experts expecting it to take a year or more to recover.
Analysts say the economic downturn could have been even worse without additional supplies. “The SPR releases did help since prices would have been higher without them,” said Olivier Jakob of Petromatrix in Geneva.
Even with the releases, US crude stocks fell last week to their lowest levels since February. Without the 30.6 million barrels in SPR oil, inventories would have slipped below their five-year average level for the first time since late 2008, Energy Department data shows. US average retail gasoline prices, which rose to $3.91 a gallon in early May, have receded to around $3.63 a gallon. But US gasoline demand has not recovered. Motorists this summer used the least fuel since 2003. The IEA releases also came over a period of growing global supply tightness. The world’s light oil output has stalled due to maintenance in the North Sea, and Nigerian disruptions. Goldman Sachs said this week that the end of the IEA releases may usher in higher oil prices, forecasting Brent at $130 a barrel in 2012, or $16 above current levels. Others, however, say the recent intervention will give oil bulls reason to think twice. “Speculators now know they can’t just bet on prices rising with impunity,” Jaffe said.

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