Some of the major practitioners and protagonists of ‘Realpolitik’ in recent times, the likes of Henry Kissinger acting as a midwife to the organization, IEA was formed to counter-balance OPEC in the strategically and politically crucial energy markets.
What made the IEA take this extreme action is a matter of intense debate.
The very idea has been reverberating for some weeks now. Already last week, there were indications to that effect.
Yet despite all the murmurs, the step surprised — rather baffled — many in the industry.
Oil prices have been falling in recent weeks. The NYMEX was already in the low 90s.
Despite the June 8 Vienna fracas, Arabian Gulf producers had raised the output — to the required extent — it now seems. And markets were cooling. And yet this IEA move — why?
The announcement came at a point of time when the International Monetary Fund was warning of a global economic slowdown.
Another financial crisis was possibly in making — but crude prices were not to be really blamed.
With sovereign debt crisis in Greece threatening the current global economic facade, the US economic recovery in doubt and China’s attempt to engineer a soft landing from a property boom and inflationary cycle being increasingly questioned — there were definite ominous clouds on crude demand growth too.
June data available so far shows US refineries were processing about one percent less crude than government forecasters’ projected and oil demand was lagging expectations by 2.5 percent.
Earlier in the week, Federal Reserve Chairman Ben Bernanke warned that the US economy was weaker lowering this year’s gross domestic product growth estimate to 2.9 percent from 3.3 percent.
So why this move, now? Both political and economic motives could be cited.
For President Obama, facing a difficult re-election next year amid a weak economy, to some it is another attempt to reinflate the US.
And with the US about to withdraw the proactive stimulus, the Quantitative Easing (QE), the administration needed to do something to keep the economy on bubble — if not boil. And it definitely was in no position to continue the stimulus for ever.
That had to be withdrawn. And with fiscal and monetary responses all but exhausted, after staving off the spiral from the first GFC, the issue was how to give an extra fillip to economic growth while containing inflation has been an economic Gordian knot. And thus another gimmickry was though off — the IEA Quantitative Easing – this time. A boost to the oil supply using strategic reserves is one trigger, many thought.
“This should be considered the equivalent of a global co-ordinated rate cut,” says Russ Certo, a US-based debt trader.
“If our projections are realized, the IEA release provides the equivalent of a $140 billion stimulus to consumers,” JPMorgan Chase said in a note.
“The release will prove stimulatory to the global economy, particularly for emerging markets and the US.”
Analysts said the move likely reflected increasing concern that the global economy is slowing, and that high oil prices boost inflation and dampen consumer demand.
The move has been criticized by some in the oil industry as an unnecessary distortion of markets, a fundamental shift on the part of industrialized nations toward intervention in commodity markets as an economic policy tool.
Besides, with speculative interest in crude growing, some felt “OPEC wasn’t the only target.”
Immediately after the move, the great surge of investor money that had flowed into the oil market has been almost completely unwound, data from the US regulator showed on Friday.
Investor equivalent to over 350 million barrels of oil on paper had flown into US crude oil futures between February and April.
But since then hedge fund managers and others have been swiftly paring back, with combined net longs in New York and London down by 45 percent from their peak.
Hedge funds and other large speculators slashed their bullish bets on higher oil prices in New York and London recently.
The group cut its net long positions in futures and options contracts by 26,092 positions in New York to 167,470 in the week to June 21, a reduction of more than 13 percent.
In London, money managers cut their net long positions by almost 40 percent, the biggest percentage drop since January.
And in the midst of all this a flurry of diplomatic activity was on too.
A senior official in President Obama’s administration said, “The action is being done with full consultation with the major producing countries. It’s intended to complement the effort of many countries, including Saudi Arabia.”
In Paris, Richard Jones, a former US diplomat who is now the deputy executive director of the IEA, insisted: “Before the release (announcement) took place, we were in consultation with some of these countries, and there is a good understanding that this is not an action directed against OPEC."
Yet temperatures are definitely up. Some are warning of possible OPEC retaliatory measures.
“If we see a glut or a fall in prices, OPEC will call an emergency meeting to correct” them, one OPEC delegate said, reacting to move.
Anger was palpable “This is surprising and unjustified,” an official from a Gulf OPEC member said.
“The agency is acting on its own and we don’t see a need for the release of emergency stocks.”
“We will feel the impact of the drop in prices. It will cause prejudice to oil producers,” said a delegate from another OPEC member.
“The global economy has not turned around enough” to justify more oil supply, an OPEC delegate said.
“The oil price hasn’t shot up to $150. There is no reason to do this. The market is not short of supply. Kuwait and Saudi Arabia have been raising production, but there have not been many buyers. The IEA is just playing politics with the US,” emphasized another Gulf delegate.
Earlier, the OPEC Secretary-General Abdullah Al-Badri had accused the IEA of being unprofessional.
“Strategic reserves should be kept for their purpose and not used as a weapon against OPEC,” Al-Badri told Reuters before the announcement.
The coming weeks could be difficult for the doves in energy markets.
With anger seething — fireworks could be in store.
Decades of quiet diplomacy may have gone into vain.
And then after all this energy quantitative easing cannot continue forever.
At best it is a temporary phase. Was it absolutely required at this moment — continues to haunt many today.
Eyes remain focused on Riyadh. Until the writing of these lines — Saudi Arabia has refrained from commenting on the move. And much would depend on how Riyadh perceives the IEA announcement.
Let’s wait until the final verdict.
