IEA pricks oil’s bubble by releasing strategic stocks
The IEA’s release of crude from strategic stocks is less about Libya than about the global economy – and it should send oil prices tumbling
THE International Energy Agency (IEA) has been saying since the turn of the year that oil prices were too high for the world economy. Today it acted to crash the market.
Announcing the release of 60 million barrels of crude oil – or 2 million barrels a day for the next 30 days – the IEA said it was replacing output lost during Libya’s conflict. The war there has starved the market of quality oil and supported Brent prices. The IEA claimed 132 million barrels have been lost since the start of May.
The stock release immediately put the skids under oil prices. Brent fell to below $106 a barrel, before staging what will surely be a short-lived recovery to around $108/b.
But forget Libya. The IEA is manipulating the market lower. Libya’s outage gives cover to a political decision to burst an oil bubble that the agency believes has pushed Western economies into the red zone.
That means this stock release may not be the last. The IEA’s statement was explicit: it will review the market within 30 days and decide on further action. A 4.1 billion barrel war chest gives it ample oil to douse the market. If that doesn’t send bulls running for cover, the involvement of Saudi Arabia should.
The most plausible theory now doing the rounds is that a tacit agreement between the IEA, the US and Saudi Arabia went along the following lines: whatever happened at the Opec meeting on 8 June, the kingdom would make oil available to the market. If that didn’t soften prices – and it didn’t – the IEA would release stocks.
Saudi Arabia, said one analyst with close knowledge of its oil policy, has at last become convinced the US economy is in serious danger and that a strategic weakening of the oil market is necessary.
Meanwhile, the US has spent recent weeks signalling that it may unilaterally release its own stocks. A combined release by IEA members is a much more powerful signal to the market – and one for which the White House has lobbied hard.
With the three most powerful forces in the global oil market – its biggest consumer, its biggest exporter and its biggest bank of stocks – colluding to drive prices lower, support for oil prices cannot last.
Black day for the bulls
And there could be more black days for the oil market’s bulls, as the spectre of 2008 begins to hover over global markets. The global economy looks weaker by the day. New US jobless figures released on 23 June were worse than expected. Data from China showed that its manufacturing sector has now stalled – the consequence of the government’s efforts to dampen inflation.
The Eurozone is facing a sovereign-debt crisis that shows little sign of easing – and, if Greece defaults, could grow much worse when the wolf pack moves onto southern Europe’s other troubled economies.
The West is running out of options to revive its dying patient. Rock-bottom interest rates haven’t worked. Drastic debt-reduction plans have hurt growth in some economies. A competitive devaluation of the dollar hasn’t solved the unemployment problem in the world’s most important economy.
Federal Reserve boss Ben Bernanke reckons US GDP will grow by as little 2.7% this year, compared with earlier estimates of up to 3.3%. And extending the quantitative easing programme beyond the end of the month is out of the question – inflation is too great a worry.
Releasing crude from strategic stocks is drastic shock therapy, and it comes after the other treatments have failed.
The price correction has already started. Now the IEA has to hope it lasts. It should, because if it doesn’t, the outlook, especially in Western economies, is bleak. Either way, the coming months will be bumpy.
As Opec secretary-general Abdalla El-Badri said in an interview with Petroleum Economist last week, “volatility is now the name of the game”. Anyone long on oil now better have strong nerves and a cast-iron stomach.