West sends clear signal on oil

SYLVIA PFEIFER | JUNE 2011 | SOURCE: FT.com

The IEA may have warned the market five weeks ago that its members were prepared to release strategic stockpiles of oil to safeguard the global recovery, but its decision to follow through on the threat has sent shockwaves through the market.

The action itself – and the timing of it – is a clear signal that, in the absence of any official action from Opec, the oil-producing cartel, to pump more crude, western nations are prepared to act to help alleviate global supply problems.

It also raises questions over the agency’s use of its strategic reserves, according to market watchers.

A decision to release strategic stocks has been taken only twice before – in 1991 when western allies attacked Iraq in response to its invasion of Kuwait, and in 2005 after hurricane Katrina – and the IEA can only release its reserves in response to stoppages in supply.

John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, said the move was “an important sign as Iran continues to be defiant, Saudi Arabia and others will play a role in making sure Iran is properly handled. It could be a co-ordinated message against Iran.”

But, Leo Drollas, chief economist at the Centre for Global Energy Studies, a think-tank in London, said that the move could create problems for Saudi Arabia.

“You are taking away some of Saudi Arabia’s bargaining power with other Opec members.

“It’s almost like a pre-emptive move from an organisation that has a lot of stocks and you want to use this weapon sparingly.

“It creates some problems of trust and politics between the IEA and Opec.”

Related article: IEA to release 60 mn bbls of strategic stocks

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