IEA Release of Oil Supply Eases Prices, Raises Hackles

The International Energy Agencys surprising move to ease global energy prices by releasing emergency reserves of crude oil jumped out to a good start Thursday but not without sparking controversy.

It looks to me like a desperate act of a world in trouble, said commodities expert Kevin Kerr, president of Kerr Trading International. Releasing (emergency oil) supplies just to bring down prices is a mistake and similar to putting a bandage on an amputated limb -- it's better than nothing but not much.  In the end it will do nothing for the critically ill patient.

The IEA said the move was necessary because supply disruptions stemming from the political strife in Libya have threatened global reserves just as many developed countries are heading into summer, traditionally a period of high energy consumption.

The U.S. is leading the effort, announcing that half of the 60 million barrels of petroleum to be released will come from emergency reserves in the U.S.

We are taking this action in response to the ongoing loss of crude due to supply disruptions in Libya and other countries and their impact on the global economic recovery, U.S. Energy Secretary Steven Chu said in a statement.

The large role played by the U.S. has critics of the move charging politics. To wit, the Obama administration pushed for the release in an effort to curry favor with an electorate battered by gas approaching $4 a gallon, plunging home values and stubbornly high unemployment.

Its hard not look at this with a jaundiced eye, said Stephen Schork, an analyst with the Schork Group in Philadelphia.

Republican Congressman Kevin McCarthy issued in a statement calling the decision pathetic. McCarthy said the Obama administration should step up domestic energy production rather than tap into supplies intended for emergencies. 

With the global economic recovery stalling, the IEA said the move is designed to ease energy prices for businesses and consumers and hopefully provide a jolt to sagging economies in the U.S. and Europe.

Oil futures plunged on the announcement with crude for August delivery falling below $90 a barrel, or more than 5%, shortly after the contracts opened for trading on the New York Mercantile Exchange. It marked the lowest level for oil future prices in four months.

In Europe, Brent crude for August delivery slipped below $108 a barrel, or more than 6%, on the London-based ICE Futures Europe Exchange.

Schork noted as have many other analysts skeptical of the decision that the IEA has only released emergency reserves on two prior occasions: in 1991 after the outbreak of the first Gulf War, and in 2005 after Hurricane Katrina devastated refineries in Louisiana.

Wheres the (current) emergency? he asked. This is an over-reach by a White House that could potentially be panic mode.

Schork said he has no problem with efforts to cut energy prices with the broader goal of sparking the global economy. But this effort will have minimal impact on actual global demand, he said.

It may push futures prices down temporarily, he said, but it doesnt address the larger problem: There is an abject lack of clarity for our energy policy, he said.

Whats more, by tapping perhaps prematurely into the Strategic Petroleum Reserve, which is intended solely for emergencies, the Obama administration risks limiting its future options. Once you cannibalize your emergency supply what card is there left to play? he said.

The SPR was created in response to the Arab oil embargo that staggered the U.S in the early 1970s. Americans lined up for hours at gas stations fearing supplies would run out.

The president can authorize releases from the 727-million barrel reserve in the event of emergencies that threaten the U.S. economy or national security.

The White House on Thursday denied that politics played any role in the decision: The overriding purpose of our effort is to increase supply to counter any shortfall and to meet the seasonal increase in demand over the summer. Were heading into a period in which demand for oil tends to be at its highest&this release is intended to address that increasing demand.

The U.S. maintains an emergency reserve precisely for this purposeto respond to domestic or international energy supply shortages and disruptions of significant scope or duration that have a potentially demanding effect on the economy, a White House spokesman told reporters.

Kerr is skeptical: The reality is that tapping the SPR should always be withheld except for the most dire reasons -- natural disaster, armed conflict with true disruption, etc&  Not because of terrible economic policy and money printing. Bottom line is this is a form of market manipulation that really won't have any long term impact except to weaken the economy more.

Darrin Newsom, an analyst at Telvent DTN in Omaha, Neb., said the move itself makes sense if the motive was purely to drive down energy prices, especially throughout the fragile economies of Europe.

But the timing seemed odd to him.

There is some concern over supply and demand but its not critical, he said. Were not going to run out of world supply of oil. Weve been dealing with the with Libya situation for months.

Newsom likened the move to a chess maneuver in that the news alone was enough to trigger sell trades programmed into the computers of large hedge funds that were speculating in oil future and driving the price higher at the height of the political turmoil in the Middle East in the spring.

The IEA may have been specifically targeting the market for European traded Brent futures, which continued to trade higher than futures in the U.S. even after the political turmoil eased in many areas of the Middle East.

Theyve got to break the crude oil market, he said. The global economy cannot continue to deal with global crude oil prices at these levels.

Once the price of Brent futures falls, the market for West Texas Intermediate futures will follow, he said. That should serve the larger goal of bringing some relief to the battered European and U.S. economies.