Tapping oil hoard effective, IEA says; But was it right?

by Bob Tippee, Editor

The International Energy Agency has responded to critics of its June announcement of a 60-million-bbl withdrawal of oil from strategic storage by saluting market liquidity and proclaiming, "We take a resolutely positive view so far."

In its July Oil Market Report, IEA noted criticism that its move came 3 months after disruption to Libyan crude oil production, promised to lower emergency inventories, and failed to cut prices of crude and motor fuel.

IEA said withdrawal would have been tempting in February, when the Libyan crisis began and crude prices jumped by $10/bbl, if price control had been the primary motivation. But the crisis began while demand for crude by refiners was falling seasonally, a pattern that reversed course in June.

In March, inventories looked "comfortable," and undisrupted members of the Organization of Petroleum Exporting Countries were expected to raise production to offset the Libyan loss. But the lack of a major OPEC response until June threatened to pull inventories to the bottom of their seasonal range and push oil prices back up in the third quarter.

"The IEA therefore decided to act to address this supply-side issue, even though prices were then trending lower," the agency said.

The 30-day withdrawal of light-sweet crude and products from strategic stocks "is about providing short-term physical liquidity to the market." It represented just over 1% of total IEA inventory.

The agency expects physical effects of the action to last through July and August. Release of 30 million bbl from the US Strategic Petroleum Reserve "will likely result in a rerouting of alternative light-sweet crude supplies into Europe and Asia," it said.

Price, IEA added, isn't the proper gauge of success.

"Narrower sweet-sour spreads, modestly stronger refining margins, and an easing of the steep backwardation evident before the release, on the other hand, all suggest a more benevolent market reaction," it said.

Swell. But is IEA supposed to intervene in markets this way? That's the critics' core concern. IEA didn't address it.

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