Thursday, the IEAannounced it would releasetwo million barrels of oil a day for 30 days from member countries’ stockpiles—about half of which will come from the United States’ Strategic Petroleum Reserve(SPR), since America has more emergency reserves than the rest of the 28 IEA member countries combined. The news put downward pressure on prices—NYMEX crude oil futures fell as much as 6% by the morning. Stocks fell big but rallied back strongly late in the day to finish down just a bit.
IEA-authorized releases have happened only twice before in recent history—in 1991 during the Persian Gulf War and in 2005 after Hurricane Katrina hit the Gulf Coast. This release was reportedly in response to Libya’s ongoing oil production disruption. Fair enough—before going mostly offline, Libya produced about 1.6 million barrels per day. However, in our view, the move was a bit unnecessary at this point. Brent crudeoil prices have already fallen about 14% from their late-April highs, and Saudi Arabia has already pledged to unilaterally increase production (and has the spare capacity to do it). Maybe the IEA was nervous the increase would be slow to come, since at OPEC’s recent meeting the cartel failed to agreeto a quota increase. But in our view, that’s not a barrier to Saudi Arabia increasing production—OPEC members frequently agree (or disagree) to one thing and do another, acting in their own best interests.
Or maybe, this was a bit of a political move. Here’s a chance for politicians to plant a flag in having “done something” about higher oil prices. (No matter that the “something” likely has a fleeting impact.) Whatever the IEA’s motivations, here are a few facts about the current release and its likely impact:
Facts on the ground seem to indicate yesterday’s drop in oil prices could be relatively short-lived. Though the US and parts of the EU have hit soft patches (though are still overall growing), expectations are generally for the developed world to speed again—and the global economy overall is still expanding. A growing world increasingly needs energy, and material production increases are difficult to realize. All signs point to oil prices likely remaining firm longer term.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.