The IEA is now expected to convene its members by July 23 to decide whether to release more emergency oil stocks or not? In its July monthly report, the IEA warned that despite the 0.8 million bpd increase in OPEC production in June, the need for additional oil supplies this quarter from the group has barely diminished.
“We’re still seeing a sharp rise in the call for the third quarter overall,” David Fyfe, the IEA Oil Industry & Markets head emphasized, adding, “we’re really going to be assessing the situation very carefully in the early part of next week.”
It was too early to say whether it might be necessary for the IEA to draw on stocks again, he added.
The gap between actual OPEC output and what the world needs the group to produce in the third quarter to meet seasonal demand increases, was 1.3 million barrels a day in June, versus 1.5 million barrels a day in May, the IEA said. A significant part of this supply gap will be filled by the emergency stock release during July and August, avoiding a “damaging and sustained surge in international oil prices,” the IEA continues to emphasize.
And though good, old, acquaintance David Fyfe, appears convinced, that the IEA move last month was correct, yet, not everyone seems persuaded. Within the IEA too, not all are on the same page on the issue. Germany and Italy are likely to oppose a second release of emergency oil reserves by the IEA, a French government source was quoted as saying on Friday.
“Germany and Italy were not much in favor of the decision back in June,” the source said. “While the decision was unanimous not all were committed,” the source added. Asked whether they would resist this time, the source said: “This is likely.”
This impression got reinforced when a German government official when asked if the IEA should release further from strategic stocks, said that oil reserves previously released by the International Energy Agency have not been fully utilized. “On the demand side, the released oil reserves have not yet been fully utilized,” the official said. Question marks about the demand side of the equation continues to haunt the markets, it seems. The German official clarified at the IEA was yet to deliberate on the issue and that Germany wanted to wait for the IEA’s opinion.
On the other hand, while analysts kept speculating the real reason behind the move, the IEA too kept delineating its action — attempting to prove it correct. The appetite for oil from strategic reserves is greater today than after Hurricane Katrina in 2005, the IEA said. Issuing a firm rebuttal to critics, the IEA underscored the draw-down was having the intended impact. “In the case of crude oil, anticipation of more supplies from some Middle Eastern countries first, and then from IEA strategic stocks, helped to put downward pressure on prices,” its Monthly Oil Report insisted.
Underlining it was “compelled” to defend its action, rather robustly and indeed unusually, the IEA hit back at the “blinkered focus” on the price of oil. Flexibility of the markets was an important factor in the decision and the price of light sweet crude, relative to heavier grades, has fallen after the release, it pointed out, adding it would’ve been tempted to intervene in February when the Libyan conflict erupted had its action been motivated by price control (only). Action from its members, the IEA said, was about providing short-term liquidity to the market.
Yet most analysts concur that though the official IEA position is; the decision was to bide time until additional shipment from Saudi Arabia reaches and stabilizes market, the real motive was to deflate the crude price balloon.
And interestingly that has not happened. After an initial dip, prices are almost back to the pre- release levels. And a sense of uneasiness is definitely visible within IEA ranks. The agency is on back foot, one could say with some confidence. The sort of reactions and clarifications coming out of the IEA headquarters in Paris is not very usual — one can’t help underlining.
Interestingly, the IEA considering making another release from its strategic reserves is extraordinary in many ways. There are definite clouds on the crude horizon. Investor appetite seems subdued after China’s crude imports tumbled by 11.5 percent in June from a year earlier to 4.8 million barrels per day (bpd), their lowest in eight months. Investors remain on edge also on fears the Euro zone crisis could spill over to Italy, the region’s third-largest economy and Spain — reinforcing fears about the global economic downturn.
And in the meantime, Saudi Arabia is ramping up production too. It significantly increased its output in June compared with May and could produce more in July, the executive director of the International Energy Agency conceded last Tuesday. “There is a significant increase from Saudi in June, and probably in July too,” Nobuo Tanaka said on the sidelines of a meeting at the European Parliament.
It estimated that Saudi output increased to 9.7 million bpd in June — the highest level since February 2006. The IEA suggested the kingdom’s production has continued to climb this month, possibly reaching 10m b/d. A person familiar with the matter said Monday that Saudi Arabia has offered extra crude to its customers for August but refiners, particularly from Asia, have largely declined.
A senior OPEC Gulf delegate also told Reuters last Tuesday that Saudi Arabia produced more than 9.8 million barrels of oil per day in June — despite an emergency stock release by consumer nations.
Production of 9.8 million barrels per day (bpd) would mark the highest monthly figure this year and an increase of as much as 900,000 bpd from the previous month based on a Reuters survey of May output.
And this has happened while some feel, the growth of global oil demand could slow down slightly next year as government stimulus programs are winding down. It projected growth of 1.57 per cent for 2011, a downward revision of 0.02 percentage points from last month’s forecast.
The ongoing fluctuation in the market seems more a result of geo-political and the global economic undercurrents, rather than fundamentals. Drawing down from the strategic reserves could only carry a limited impact. After all this is not a tool to be used to bring the prices down. It was meant as a strategic cushion — and it should remain so.
Apparently IEA gave in to political pressure and now feels itself in a corner — the step has failed to deliver. It’s time IEA steps back from interfering in the market mechanisms. That has never been its mandate, and it has limits to its powers in that direction, one can’t help underlining.
