IEA Reports on State of Oil Markets since Emergency Stockpile Release

In an unusually strongly worded statement, the International Energy Agency (IEA) – the official energy watchdog for major consuming nations – said that its critics "can't have their cake and eat it too."

IEA made the statement in releasing its monthly oil market report on July 13, commenting on the status of oil markets since its call on June 23 for the release of 60 million barrels of oil and refined products from the emergency stockpiles of member nations, including the U.S. and Japan.

The move was made to help compensate for "a string of supply-side outage over and above" the loss of 1.5 million barrels per day (mbpd) of light sweet [i.e., easy to refine] Libyan crude oil, due to internal conflict in that nation, IEA said.

". . . [T]he market ledger this month looks slightly tighter than a month ago. Our balances for first-half 2011 [1H2011] show demand continuing to run ahead of supply, if a little less rapidly than in 2H10," IEA said.

"Major producers have recognized that demand for their oil is rising, with the seasonal uptick in 3Q11 refinery runs, and more generally as economic growth and short-term fuel substitution keep global and emerging market demand growth robust," IEA continued. "We welcome rising OPEC volumes seen in June (30.03 mbpd output), but the market needs still more oil for 3Q."

IEA continued, "This backdrop is simply a more vivid version of the one underpinning the IEA action, which commenced on 23 June. Member governments agreed to release 60 mb of strategic stocks for an initial 30 days, amid an ongoing disruption to light-sweet Libyan oil supplies, the anticipated rise in 3Q11 refiner and end-user demand and a likely hiatus before incremental OPEC barrels reach the market. Much ink has been spilt subsequently suggesting that the IEA action comes three months too late, depletes emergency stockpiles and has failed to reduce rampant crude and motor fuel prices. However, we feel compelled to point out that critics cannot have their cake and eat it too."

"Market intervention in late-February, when the Libyan crisis broke and prices surged by at least $10/bbl, would have been tempting, were price control really the prime motivation," IEA said. "But the presence of a supply disruption, and sharply higher prices is not, by itself, justification for a collective action. Market context is also important. Refiner crude demand was falling seasonally in March and April, but rising sharply in June and moving higher still in July and August, despite modest refining margins. Early-year industry stocks looked comfortable back in March, and there was a presumption then that other OPEC producers would immediately step in to boost supply to replace Libyan outages. In contrast, the absence up until June of major OPEC increases implied a real possibility that commercial stocks could fall to the bottom of their seasonal range, risking a renewed, damaging and sustained surge in international prices in 3Q11. The IEA therefore decided to act to address this supply-side issue, even though prices were then trending lower."

Marker crude prices fell by $5 per bbl immediately after the action was announced, IEA noted, adding, "Since then Brent futures have oscillated between $105-$119/bbl, and WTI between $91-$99/bbl. At writing, flat prices of $116/bbl (Brent) and $95/bbl (WTI) are close to those seen immediately prior to the action, but will doubtless fluctuate further in the weeks ahead. However, it is blinkered to focus on specific price levels, which were never the rationale for the action. 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. We acknowledge that the impact of the collective action will only be truly evident in hindsight. However, recognizing the flexibility and market liquidity it has already provided, we take a resolutely positive view so far."

IEA's move came in the wake of the last OPEC meeting on June 22, when three Middle Eastern nations – Saudi Arabia, Kuwait and the United Arab Emirates (UAE) – broke ranks from the other major producing member nations in wanting to increase production quotas to keep the world amply supplied. The three nations have since pledged to increase production in the absence of an all-OPEC accord, but there's a hiatus in the additional supply reaching the market.

Veteran OPEC-watcher Bhushan Bahree, senior director of global oil for IHS CERA, told Rigzone in a telephone interview: "Oil supplies are ramping up." Bahree added, "There was very little incentive for the other OPEC nations to agree to increase production. They have little or no spare capacity."