1. Oil and the Global Economy
After three days of responding to the twists and turns of the Greek debt crisis, oil prices fell on Thursday after the IEA announced that several members with large stockpiles were releasing 60 million barrels of oil from their strategic reserves for sale to refiners. NY crude, which had already fallen from $100 a barrel two weeks ago on bad economic news, was only marginally affected by the announcement falling from $95 a barrel to a close Friday at $91.16. London’s Brent crude, however, fell from $114 before the announcement to close on Friday at $105.52, the lowest settlement since February 18th. The difference in the reaction to the announcement was the expectation that release of stockpiled crude would have more impact in Europe which has been doing without 1.3 million b/d of Libyan exports for the last few months. The loss of Libya’s oil was largely responsible for the price increases this spring which sent Brent crude as high as $125 a barrel in May.
Although most of the 60 million barrels that will be released for OECD stockpiles in the next two months will come from US and Asian stocks, current production will likely be rerouted to European refineries to make up for the lost Libyan crude. Late last week trading in Brent crude went into “contango,” a situation in which contracts for oil delivered in distant months are trading for more than oil that will be delivered this summer. This indicates that traders expect oil prices to rise in the fall after the two months of stockpile releases are over. Some analysts are worried that the stockpile release plan will backfire, sending oil prices higher later this summer when the supply picture tightens again. They note the total amount of oil to be released from OECD stocks amounts to about 16 hours of global oil consumption.
The announcement had more effect on wholesale gasoline prices in the US where futures fell by about 20 cents a gallon to close out the week at $2.77 a gallon, down from $3.50 a gallon in early May.
The US weekly stocks report showed crude inventories down by 1.7 million barrels, gasoline inventories down by 500,000 barrels and US refineries running at their highest levels in 10 months. Also of note is that US gasoline consumption seems to be rising in response to falling prices. The EIA says that total US oil consumption is back to just over 19 million b/d, but still down about 2 million b/d from where it was 4 years ago.
2. Tapping the reserves
The announcement on Thursday that the US and other countries are going to release 60 million barrels of crude from the strategic reserve came as a surprise to the oil markets. About 30 million barrels are to come from US stockpiles, 18 million from EU stocks and 12 million from Asia. A few traders, however, seem to have gotten the word early and the US government is investigating suspicious trading patterns just prior to the announcement. Trading in the futures market using leaked information is not illegal, however. The official press release from the IEA spoke of the need to replace the 140 million barrels of oil lost from global markets by the Libyan insurrection and the likelihood of a jump in demand during the summer driving season that will drive prices higher. The release notes the threat of higher prices to global economic recovery.
Within hours of the announcement, the action became controversial with many skeptics wondering why this was the time to release reserves. The disruption in Libyan supplies has been going on for several months, and the Saudis just announced that, as the only country with significant spare capacity, they were going increase production as soon as possible even without the agreement of their fellow OPEC members. In the US the oil industry and Congressional Republicans denounced the release as a raid on emergency supplies being done for political objectives. The move is expected to step up pressure to relax US drilling restrictions.
Prior to the announcement, the IEA had been warning for weeks that economy-damaging oil prices were coming in the third quarter and that even Saudi Arabia’s best efforts could not respond quickly enough to prevent economic damage. Moreover, the IEA’s director had warned several times that the Agency was willing and able to respond to the OPEC “price hawks” -- primarily Venezuela and Iran – that were only interested in collecting more oil revenue for themselves than the welfare of the global economy.
Although President Obama discussed the release with the Saudi King last month and dispatched a delegation of senior officials to alert the Saudis, the UAE, and Kuwait to the decision, there is still concern that the release may dissuade those nations from stepping up production as rapidly as they say they intend to do.
Some OPEC members, worried that the release of stockpiled oil will deprive them of revenues they had been counting on, denounced the move and warned that it could backfire on the OECD if OPEC members made production cuts to push prices higher. Theories as to the reasons for the decision to release the stocks abound and range from preparing for next year’s elections and hurting speculators to the rationale given by the IEA about making up for lost Libyan oil. The only reason that seems to make sense is to keep prices under control, in the midst of increasingly dour economic news, until the Saudis and their OPEC allies have time to increase production.
Viewed in the context of global oil depletion, the release of 60 million barrels of oil into a world that consumes some 30 billion barrels a year is insignificant. The price drops which followed the announcement are likely to be short-lived in face of continuing unrest in the Middle East and what is shaping up to be increasing demand from China.
It was relatively quiet in Asia last week. Tropical storms continue to pound southern China bringing some drought relief and an increased flow of water through hydro-electric stations. The accompanying floods, however, are doing still more harm to China’s agricultural production.
The good news of the week was announcement by Premier Wen Jiabao that Beijing is winning the fight to control inflation while maintaining robust economic growth. As much of China’s inflation is due to increasing food prices, droughts in northern China and floods in the south would seem to leave open the question of controlling inflation until the agricultural picture is clearer.
New analysis shows that China’s apparent oil demand in May averaged 9.31 million b/d in May up by 8 percent over May of 2010. Some of China’s increased demand for diesel fuel was satisfied by curbing oil product exports which fell sharply from April levels.
Fears of a hot summer with widespread power shortages continue. The Shanghai government announced plans to ration electricity this summer, if necessary, in order to keep the key financial institutions located in the city functioning.
Quote of the week
"For the third time in the history of the International Energy Agency, our member countries have decided to act together to ensure that adequate supplies of oil are available to the global market. This decisive action demonstrates the IEA’s strong commitment to well-supplied markets and to ensuring a soft landing for world energy markets."
-- IEA Executive Director Nobuo Tanaka
The Briefs (Stories from recent Peak Oil News dailies are indicated by date and item #)