The International Energy Agency unexpectedly agreed on Thursday to release 60 million barrels of oil over the next 30 days, half of which will come from the U.S., in an effort to lower costs after unrest in Libya and the Middle East crippled supply.
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The 28 member countries of the IEA agreed to take two million barrels of oil a day from their emergency stocks over the coming months, marking the IEAs third and largest release in its 40-year history. The U.S. will release 30 million barrels of oil from the Strategic Petroleum Reserve, representing 4% of its historically high level of 727 million barrels.
The IEA said in an emergency press conference that supply disruption has been underway for some time and will only become more exacerbated with the normal seasonal increase in refiner demand through the summer.
The war in Libya has caused a loss of roughly 1.5 million barrels of oil a day of mostly light, sweet crude, and Saudi Arabia has been unable to make up for the shortfall. Analysts have predicted that Libyan supplies will remain largely suppressed for the remainder of the year.
Senior administration officials said the U.S. will target light, sweet crude, the type typically produced by Libya. The U.S. plan to increase production has been in the works for a while, officials said, and its decision is intended to compliment Saudi Arabia and other GCC member countries decision earlier this month to increase production by 1.5 million barrels a day.
We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery, said Energy Secretary Steven Chu.
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The total loss from Libya of 140 million barrels is much higher than the 38 million barrel supply disruption caused by Hurricane Katrina, the last time the U.S. released supplies from SPR.
Yet few analysts are predicting $200 oil prices as the U.S. economic recovery appears to have stalled and Europe is fighting to avoid a default in Greece. Some have said demand is actually poised to slide.
In a press conference, senior administration officials failed to say how the U.S. plan would impact prices at the pump.
We are not making predictions about market prices, which go up and down, this is about supply disruption, and prices will be where they are, one unnamed senior official told reporters on a call.
The announcement comes after OPEC failed to raise production at a meeting on June 8. OPEC Iran and Gulf OPEC delegates said on Thursday that the IEA release is not justifiable.
The U.S. Energy Department and the IEA, which is an autonomous organization representing some of the worlds biggest oil consumers, said they have been in close consultation with major producing countries about the affect the oil market could have on the global economy.
"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," the IEA said.
Shortly after the announcement, oil was down about 4.67% to $90.98 a barrel, the lowest intraday level since February 22, while the Dow dropped more than 140 points at the open as energy stocks like Chevron (CVX), BP (BP) and ExxonMobil (XOM) retreated. U.S. crude futures settled at $91.02 a barrel, the lowest close since February 18.
Goldman Sachs (GS), known as one of the most influential banks in commodities, said in a note on Thursday that Brent crude oil prices could fall by $10 to $12 a barrel by the end of July to $105 to $107 a barrel because of the IEA release.
"Given that there is no physical disruption in the US, this should put pressure on the US Gulf crude oil markets and therefore by default on Brent," trade advisory company Petromatrix said in a statement.
Goldman noted, however, that the IEA will likely have less of an impact in the longer term as oil absorbs demand, predicting an impact closer to $5 to $7 for 2012.
The IEA said it will reassess the market, and review the impact of the release, and decide on any necessary future steps in 30 days. Senior administration officials said the U.S. stands ready to do more, as and if necessary, to address this issue.