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The monthly average U.S.-dollar price of West Texas Intermediate crude oil extended its fall in June, dropping by $5.04 (5.0 percent) to $96.29 per barrel. That retreat occurred despite a weak dollar and a drop-off in crude stocks during June, but coincided with a decrease in consumption of 635,000 barrels per day (BPD) -- to 18.6 million BPD -- during April.
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Perhaps the most noteworthy development during past the month was the announcement by the
International Energy Agency (IEA) that several members with large stockpiles were releasing 60 million barrels of oil from their strategic reserves for sale to refiners. New York crude prices, which had already fallen earlier in June on bad economic news, were only marginally affected by the announcement. By contrast, London’s Brent crude fell by nearly $10, to the lowest settlement since February 18. The generally accepted explanation for 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 BPD 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.
Given that the oil to be released from OECD stocks amounts to only about 16 hours of global oil consumption, many analysts are skeptical the release will depress prices for long; futures price patterns indicate 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. The well-documented critique by Alt-Market.com’s
Brandon Smith was particularly scathing.
ASPO-USA presented its “take” on the release as follows: “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 United States 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 U.S. 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.”
