IEA beats speculators at their own game

KOSTIS GEROPOULOS | JUNE 2011 | SOURCE: New Europe

The International Energy Agency (IEA) is not prepared to sit and watch what’s happening in world markets and on 23 June announced its surprising decision to release emergency crude supplies to contribute to well-supplied markets and ensure a soft landing for the world economy.

The announcement quickly caused oil prices to fall. Brent crude fell $7.02 to $107.19 per barrel on the ICE Futures exchange.

IEA beats speculators at their own game

The release of reserves comes after the Organization of Petroleum Exporting Countries (OPEC) decided against boosting its production quotas at a meeting in June.

Some observers argue that the IEA move could be a signal to OPEC and the speculators that the energy agency is not inactive and that it can use the strategic reserves for this purpose.

The IEA wanted to show OPEC it wasn’t a bluff when it said the energy agency would release emergency crude supplies. That puts pressure on OPEC as well as speculators globally. “This is the first time they are doing this for market purposes - for price control,” Manouchehr Takin, Senior Petroleum Upstream Analyst with the Centre for Global Energy Studies (CGES) in London told New Europe on 24 June.

The strategic reserves of the IEA have been set aside for political events or weather conditions. The IEA has coordinated the use of emergency stockpiles twice before.

The first occasion was during the 1991 Persian Gulf War, and the second when Hurricane Katrina hit the Gulf of Mexico in 2005. “These occasions are exceptional. But to come in and release strategic reserves into the market is really interfering in the market and that is a major policy shift to my understanding,” Takin said.

As the Central Bank regulates money flow, the oil market has to be regulated. “There has to be this ‘Central Bank role’ to ameliorate these fluctuations whether it is OPEC or in this case by the IEA, which is very strange and unexpected,” Takin said.

Both OPEC and the IEA want to stabilize the oil market. OPEC has blamed speculators for twisting the market and causing exaggerated fluctuations. But the IEA took action, signaling to the financial players that they cannot play that much with the market.

However, Takin noted that the primary reason for the IEA’s decision was the market fundamentals, including season oil demand increases and the situation in Libya.

The IEA said it would release 60 million barrels of oil over the coming month to compensate for a shortfall of supply from Libya. “This supply disruption has been underway for some time and its effect has become more pronounced as it has continued,” the IEA said.

Meanwhile, Justin Urquhart Stewart, Director of Seven Investment Management, told New Europe on 23 June the bigger issue is whether the global economy continues to slow down and therefore there will be lower levels of demand. “If we see an economic slowdown, you may actually see prices soften further,” he said.

Takin noted that it is possible there will be extra supply toward the end of the year and OPEC may have to decide at their December meeting to cut production in order to avoid surplus in the beginning of 2012.

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

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