EXCLUSIVE: US-led IEA stock release likely in September

24 August 2012

Derek Brower, LONDON: Soaring oil prices are likely to trigger a release of strategic oil stocks by Western consumer countries as soon as early September, according to several sources. The loss of supplies from sanctions-hit Iran will be used to justify the move, which could unleash as much or more oil as last year’s 60 million barrel stock release, said market insiders.

The International Energy Agency (IEA), which has been a vocal opponent of the idea, is now thought to have agreed with the plan. According to one source, the agency, persuaded by the White House’s determination, has now asked the US not to proceed alone with a release from the country’s Strategic Petroleum Reserve, but to wait for IEA-wide participation. A unilateral release from the US would undermine IEA market credibility, said the source.

Worried by the impact of rising gasoline prices on the US economy and Barack Obama’s hopes for re-election, the White House has spent recent weeks trying to persuade other consumer countries to endorse its stock-release plan.

France, which is planning measures to reduce fuel duty, and the UK have endorsed the US strategy and are willing to release their own stocks. A diplomatic source said a UK cabinet official has spent recent days In Washington, DC discussing the coordinated move.

It is understood that the IEA switched its stance and agreed to the plan after lengthy talks with US Department of Energy officials in Washington earlier this month. US officials are understood to have challenged the IEA’s stance that the market remained well supplied, suggesting it had underestimated the impact of the sanctions against Iran. Traders in the Brent physical market have reported renewed tightness in recent weeks.

A spokesman for the IEA told Petroleum Economist that the agency "continuously monitors the oil market and remains in close contact with its member countries' governments so that it stands ready to act swiftly if needed and appropriate".

Some consumer countries previously discussed price-trigger points for a stock release, with $115 a barrel and $120 a barrel both said to be in mind, according to a 23 August report from Petroleum Policy Intelligence (PPI), an oil market consultancy. However, persistent global economic weakness and the sharp rise in US gasoline prices - which on 24 August hit an average of $3.73 a gallon - have pushed the White House to revisit a plan first mooted in March.

PPI said the likeliest timing for a release would be after the US Labor Day holiday, when the White House would gain maximum political credit for the move. Volumes are likely to be 30 million barrels from the US and another 30 million barrels from the rest of the IEA, speculated some analysts.

But if the IEA and US decide they need to shock a sceptical market, the size of the release could be even bigger, argued PPI.

Stephen Schork, editor of Schork Report, an influential oil-market newsletter, said the release could be made as early as 31 August, the Friday before the bank holiday on 3 September, or in the week after Labor Day.

That would give a release three weeks to bring US gasoline prices down before the first presidential election debate between Barack Obama and his challenger, Mitt Romney.

"Otherwise, on the eve of the debates, people are going to be paying well in excess of $4/g," Schork said. "That’s $1.50/g more than where gasoline was when Obama was elected". President Obama won in November 2008 against a backdrop of falling oil and gasoline prices, as the global economy went into a tailspin.

But the move still faces some opposition among other IEA members. Japan recently spoke against a stock release, saying the market remained amply supplied despite a near-25% rise in oil prices in the past two months. Germany is also sceptical. The UK’s Department of Energy and Climate Change also remains opposed to the plan, despite Downing Street’s backing for the release.

Earlier this month, IEA executive director Maria van der Hoeven said a release was unnecessary because "there’s no disruption of supply [so] there’s no reason for the IEA to be involved".

Yet that stance has crumbled under pressure from the US, according to sources. The IEA has said sanctions against Iran have withdrawn around 740,000 barrels a day (b/d) of supply from the market. "Whether it’s self-inflicted or not, that’s still a supply disruption," said an official at a government backing the release.

The Iran sanctions, it has become clear, will give political cover for the release. The September loading schedule from the Forties fields in the North Sea - where maintenance will severely curtail supplies next month - is at least as responsible as Iran for the recent surge in Brent prices. But technical issues in the North Sea won’t play politically, say analysts. "People understand [the] Iran [issue]," said Schork.

The US and UK have also sought to gain assurances from Saudi Arabia that it would endorse the stock release, said an official.

The kingdom, it is understood, sees no need for a release, and believes it is a sovereign decision for consumer countries. Saudi Arabia has said it wants oil prices to fall to around $100/b and has spent recent months pumping around 10 million b/d to help build global oil stocks and balance the market.

Iran, meanwhile, has said it will call for an emergency Opec meeting if the IEA releases stocks. "If it happens then there has to be a collective action," said the country’s oil ministry spokesman, Ali Reza Nikzad Rahbar, according to Platts.

However, unless Saudi Arabia and other Gulf producers abandon their policy to balance the market, it is unclear which Opec members would shoulder any cut in supply to accommodate the IEA release.

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