IEA's move meant to send a shock wave to the market

Markets Reuters

By Muriel Boselli

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PARIS (Reuters) - A high level of emergency stocks enabled industrialized nations to divert their purpose to support a fragile economic recovery rather than to handle severe oil supply disruptions, a diplomatic source said.

Consuming nations agreed last week to release oil from emergency stockpiles for only the third time in history.

The news took oil markets by storm, knocking around six percent off international benchmark Brent crude and providing some relief for a fragile world economy.

"Our analysis, which was convergent between us and the Americans, was that the traditional tools were not sufficient and that we needed to create a surprise effect in the markets," the European diplomatic source added.

Discussions over the supply release began in earnest in May, but it was only approved by all 28 of the International Energy Agency's 28 members by midday European time on Thursday.

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Only three hours later at 1300 GMT, a news conference was called in Paris, where IEA Executive Director Nobuo Tanaka announced the 60 million-barrel release.

That is less than 4 percent of the total of emergency stocks held by the 28 countries of the IEA.

IEA's executive director Nobuo Tanaka said on Tuesday the release was a temporary measure to fill a supply gap from missing Libyan output before extra Saudi Arabian production emerged.

"It's a pre-emptive use, in that way this is a new mechanism," Tanaka said. "We decided pre-emptively to move toward seeking a soft landing for the global energy market.

The source said the stocks release amounted to a fundamental shift at least on this occasion and that had only been possible because stock levels were high.

"It's a tool which has been designed to respond to oil disruption. And it's not the case this time," the source added.

PHILOSOPHICAL REFLEXION

Discussions before the release decision had been "a philosophical reflexion on the use of strategic stocks."

"To be clear we did not divert strategic stocks from their initial aim. They still exist. We had margins of maneuver for this extraordinary operation," he added.

The IEA, founded in 1974 following the Arab oil embargo, has only previously released emergency reserves in 1991 at the time of the first Gulf War and in 2005 after Hurricane Katrina ripped through oil infrastructure in the U.S. Gulf.

Some analysts have said the impact this time could be muted because of the strength of Asian demand.

Oil markets rose on Tuesday as an agreement by France to roll over holdings of mature Greek debt boosted appetite for riskier assets like commodities and helped lift the euro against the dollar. <O/R>

Some of the sell-off since the April high was driven by expectations of reduced demand in the United States and other Western nations where fragile economies are ill-placed to cope with the strain of expensive oil.

The source confirmed comment from U.S. officials that the U.S.-led plan gained real momentum after a failed OPEC meeting earlier this month.

"The proposal came from the U.S. around the end of May," he said. "Discussions started then but there was no decision taken at that point because we had to see what would happen from the producers' end with the OPEC meeting."

The IEA placed heavy pressure on the Organization of the Petroleum Exporting Countries and threatened it would use "all the tools" at its disposal if it did not raise production.

OPEC failed to reach agreement after seven members, including Iran, opposed a Saudi proposal to pump more oil, although Saudi Arabia has said it will produce whatever the market needs in any case.

(Editing by Barbara Lewis)