Release of IEA Oil Stockpiles will only have Temporary Impact on Prices

Posted on : Sat, 23 July 2011

On June 23rd, the International Energy Agency (IEA) announced that its members would be releasing 60m barrels of their strategic oil reserves onto the market over the next month. This is unlikely to have a long-term impact on prices, according to QNB Capital.

The IEA is a grouping of 28 major oil importing countries. It was established in 1973 to monitor the oil market and counterbalance the influence of the Organisation of Petroleum Exporting Countries (OPEC). This is only the third time in its history that the IEA has released a portion of its strategic reserves. The previous times were in response to Hurricane Katrina in 2005 and the Gulf War in 1991.

The IEA stated that the coordinated move was a response to the supply disruption caused by the recent unrest in Libya. The IEA is concerned that this has driven oil prices too high, threatening to weaken the fragile global economic recovery. This suggests that IEA members, major European economies and the US are extremely worried about the state of the global economy. Half of the IEA release will come from US reserves.

The IEA announcement was made after OPEC took the decision to keep its production quotas of 24.8m barrels per day unchanged at its last meeting in early June. The IEA had been lobbying OPEC to increase production. Therefore, the release of strategic reserves can also be seen as a response to OPEC’s decision to keep production unchanged.

The IEA announcement surprised the oil market. Crude oil prices immediately fell by around US$8/b in London and US$6/b in New York, although they closed US$6/b and US$4/b lower, respectively, for the day. However, by July 1st, the price of the international benchmark, Brent crude oil, had recovered to an average of US$112/b, marginally higher than its average price on June 22nd, the day before the IEA announcement.

The rapid recovery in oil prices suggests that the impact of the release of strategic reserves will be minimal in the longer term, according to QNB Capital. Total world consumption of crude oil is currently around 90m barrels per day (b/d). Therefore, the IEA decision to release 60m barrels of crude oil over 30 days, or 2m b/d, is only around 2.2% of global demand, for just one month.

The release of 60m barrels represented around 4.6% of government stocks of crude oil in OECD countries (a grouping of developed countries that has the same membership as the IEA, with six additional relatively small countries). If industry stocks and petroleum products are also taken into account, 60m barrels only represents 1.4% of overall reserves in OECD countries. Given that the market absorbed the release of strategic reserves within a short period, the ability for the IEA to influence the oil market by releasing reserves has been shown to be limited. Further releases are therefore highly unlikely.