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A release of 60 million barrels of crude oil from consumer nations’ reserves signals consumers working with producers, analysts said today.
The release represents a significant addition to recent supply increases from producing countries in an attempt to sustain a fragile economic recovery.
The decision on Thursday to release 30 million barrels from the U.S. Strategic Petroleum Reserve, plus a matching amount from 27 other International Energy Agency member countries over the next 30 days, surprised oil-market watchers who previously believed the market was well supplied enough to limit renewed price rises.
But What Does It Mean?
Analysts said both the size of the release and the decision itself went against market expectations, given that Saudi Arabia, Kuwait and the United Arab Emirates had said they would pump more crude following the failure of OPEC’s latest talks to agree on any increase to counter rising world oil prices.
But major producing nations appear to have backed the move, which the IEA said was intended to complement expected increases in output by producer countries.
“All the evidence is that the Administration spoke to all the producers that count,” said Lucian Pugliaresi, president of the Energy Policy Research Foundation in Washington DC. “As far as I understand, the Saudis were on board with it. There was no substantial opposition.”
But Raymond Learsy, a member of the Woodrow Wilson International Center for Scholars, argued that the release marks a new assertion of power by oil consumers.
“The consuming countries for the first time have really sent a shot over the bows of the OPEC producers, saying ‘Now we are going to do things differently,’” said Learsy, the author of a new book on the oil business. “This is a very significant development in terms of the relationship between producers and consumers.”
News of the release – the first from the U.S. reserve since the aftermath of Hurricane Katrina in 2005 – drove European benchmark Brent crude futures down as much as $8 a barrel. U.S. benchmark West Texas Intermediate dropped around $3.75 a barrel to $91.65 by early afternoon Thursday, compared with a recent high of $114 in early May.
The price decline showed consuming countries can have a powerful effect on the market, said Learsy.
The size of the U.S. reserve at around 750 million barrels, plus higher amounts held by the IEA and in commercial stockpiles indicates that the instigators stand ready to repeat the move if they deem it necessary to protect their economies, he argued.
Guy Caruso, senior advisor at the Center for Strategic and International Studies, said the move was designed to boost consuming nations’ economies where growth has been slowing amid high energy prices spurred by crude that has recently climbed to around $100 a barrel for U.S. benchmark West Texas Intermediate.
“This is because of weak economic numbers,” said Caruso, a former administrator of the U.S. Energy Information Administration. “They are looking for every bit of help that they can in lowering energy prices.”
The IEA said the economy was threatened by higher oil prices reflecting interruption in supply from Libya and a normal seasonal increase in demand.
“I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy,” said IEA Executive Director Nobuo Tanaka.
The move follows a statement by the U.S. Federal Reserve on Wednesday that it was leaving interest rates at near zero because of a weaker-than-expected economic recovery.
Caption: Traders work in the crude oil and natural gas options pit on the floor of the New York Mercantile Exchange on June 20, 2011 in New York City. Following continued negative financial news out of Europe and Greece, oil prices were trading in negative territory after dropping to a six-month low. Texas light sweet crude oil for August delivery was falling 39 cents to $93.01 a barrel. (Photo by Spencer Platt/Getty Images)