Prices rise as oil market ignores IEA intervention
Prices rose despite Saudi Arabia increasing output and the IEA releasing strategic oil reserves
CRUDE oil climbed in June and July despite Saudi Arabia raising output after a breakdown in Opec talks. Prices were also resilient to the IEA releasing strategic oil reserves, bouncing back even stronger after a minor price dip. Front-month Brent crude traded up to around $118.75/b on 14 July, compared with $112/b last month, while US WTI was flat at $98.70/b.
Prices rose despite Saudi Arabia saying it would go it alone with an output increase following a bad-tempered Opec meeting in early June where members failed to agree to lift production. Saudi Arabian oil minister Ali Naimi, who wanted the cartel to increase output by 1.5 million b/d to 30.3 million b/d to ease oil prices, described the meeting as the “worst ever”. But confirming its intent to raise output, latest IEA data show June Saudi production rose by 700,000 b/d.
With worries that high oil prices will damage the Western economic recovery, on 23 June, the IEA authorised the release of 60 million barrels of oil from strategic stocks – equivalent to 2 million b/d for 30 days – in a bid to burst the oil bubble.
Although prices fell immediately after the announcement (Brent dropped below $106/b), prices bounced back. Why? Market analysts said what comes out has to go back in, so although near-term prices might be lower than they would have been without the release, prices further along the curve rose on the realisation that the stocks release must be replaced sometime in the future.
Also bullish for oil were hints from US Federal Reserve chairman Ben Bernanke that it might be willing to use another round of quantitative easing to boost the economy. The US has already held two rounds of quantitative easing – printing money to re-inflate the economy – which resulted in increased investment in riskier commodities, such as oil. Bernanke later seemed to quash bulls’ hopes, but the US’ intentions, which may also include a unilateral stock release, according to market rumours, could yet play into prices.