The release, meant to stop high energy prices from stifling economic growth, amounts to around 500,000 barrels per day (bpd) of extra supply. This is equivalent to the output of about three medium-size refineries, at a time when over a fifth of capacity is already idle due to waning demand and Asian competition.
Scores of refineries in Europe are at risk of closure or up for sale as oil majors like Royal Dutch Shell and Total look to strip out the least profitable assets from their portfolios.
Analysts and refiners have met the International Energy Agency’s (IEA) decision to coordinate the release of 30 days’ worth of oil product stocks in Europe with deep skepticism. Many expect a portion to remain trapped in tanks for lack of demand.
The fuels that are released will drive prices down further this summer after a knee-jerk sell-off on Monday, traders said, easing consumer inflation fears but further eating into refiners’ profitability.
“The IEA data has nuked the market. It makes one wonder how they’ll replace the stocks, seeing as they’ll likely put half the European refining community out of business in the process,” said a distillates trader with a trading house.
The announcement knocked down European gasoline prices by around 7 percent and weighed on distillate prices.
“The 15 million barrels of products should mean that refinery margins get pummelled and runs are cut, seeing as demand is already poor,” said a European oil trader with a bank.
Industry analysts and traders were dubious about the decision to release such a high portion of oil products instead of the light, sweet crude oil the IEA has said is required to replace Libyan exports lost due to conflict in the OPEC producer.
Over half of the fuels or around 8 million barrels, will be distillates like diesel even though commercial
stocks in the storage hub of Amsterdam-Rotterdam-Antwerp are already near record highs.
The release of refined products in Europe is also in sharp contrast with the US, where all of the emergency oil stocks are crude — a decision likely to be welcomed by refiners, as it will make oil cheaper to process .
“The latest development shows once again that US refiners have much more political clout than their European counterparts. While European markets have been swamped with extra product supplies at a time when a quarter of refining capacity is idle, US refiners are getting more discounted crude,” said David Wech at JBC Energy.
European run rates are already hovering near post-recession lows at 79 percent of capacity and at least 10 percentage points below US levels — largely because of the hefty premium of European benchmark Brent crude to US futures.
While it will be mandatory under the IEA measures for holders of commercial oil products stocks to offer supplies for sale, there is no guarantee that buyers will come forward.
Wech predicted only around 350,000 bpd of the planned 500,000 bpd would be released this summer .
In the case of Britain, for example, obligations backed by the IEA for stockholders to keep enough supplies for a minimum period will simply be lowered, which may not result in an immediate sale of surplus volumes, traders said.
Traders said the marketing and pricing mechanisms for the sale, which are currently unclear, will be key in determining the ultimate take-up.
“You have a notional amount of 60 million barrels that is made available, and what ultimately will be taken up by the market will depend on the marketing mechanisms chosen to make that oil available: so essentially the prices at which the national agencies sell that oil,” BNP Paribas’ head of commodity markets strategy Harry Tchilinguirian said.
Traders said some savvy traders could benefit from the extra supply injection of distillates like diesel by exploiting a deeper contango in the ICE gasoil futures curve.
European ICE gasoil futures are currently in a $4 contango — a structure where the front month contract is below those further in the future — and some traders expect the stock release could steepen this structure and make storage more lucrative.
But as with the multi-billion dollar storage trade that emerged due to oversupplies after the 2008 recession, the refined oil may simply be transferred from one tank to another.
“People will just play the contango with the barrels. The fact is there’s no demand,” said a trader with a European refiner.
But traders said owners of storage may be punished by a steep contango since they will be forced to buy back their own oil at a higher price later to replenish stocks.
Another possible scenario is the stock release boosts exports, but traders said arbitrage economics for diesel for example are not currently profitable.
