IEA Keeps Oil Down In Shock Move

Online, July 4, 2011 (Newswire.com) - The International Energy Agency, a coalition of oil-importing nations recently announced plans to release 60 million barrels of crude from emergency stockpiles over the next month, half of which will come from the U.S. Strategic Petroleum Reserve, 30% of Europe, and 20% Pacific members. This injection will help to increase approximately 2.5% of world supply. After announcement of regarding decision, it has had a direct and immediate effect in energy market and the oil prices have down by 7%. This is the third time of such a joint intervention of the IEA in its 37 years history. The last reserve release was happened in 2005 after Katrina Hurricane in US. The agency has more than 4.1 billion barrel oil stock and 1.6 billion barrel is allocated as an emergency reserve in case of supply interruption. The underlying reason of such reaction is to prevent speculative movements regarding to fears on short term supply shortage in the market and pre-emptive moves to prevent further increase in oil prices.

The move shocked traders who had been expecting the IEA to give top exporter Saudi Arabia more time to make up for the supply shortfall following OPEC's failed meeting on June 8, when other members blocked Gulf efforts to hike output. Goldman Sachs, whose oil price forecasts are closely watched by markets, said the release of the IEA oil could knock prices for Brent crude down by $10 to $12 a barrel. The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya's 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude -- although many analysts and agencies also agree that markets will tighten later this year. The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve -- the same quality that markets have lost due to the Libya disruption.

Brent crude futures for August plunged by more than $8 after the news, before settling at a four-month low of $107.26 a barrel, down $6.95 for the day. Bankers J.P. Morgan and Goldman Sachs slashed forecasts for crude prices in the third quarter after the International Energy Agency announcement. J.P. Morgan cut its average forecast for Brent crude to $100 a barrel in the third quarter, down from its previous projection of $130. Goldman Sachs , one of the most influential banks in commodities, expects Brent prices to fall to $105-$107 a barrel by the end of July.

The Iranian governor for OPEC, Mohammad Ali Khtatibi has said IEA's decision to draw oil from its emergency reserves implies intervention in the ordinary function of the oil market, and the trend of falling oil prices will not be sustainable. Oil markets were already down sharply ahead of news of the release, due to worries over global fuel demand following higher-than-expected U.S. jobless claims, forecasts of lower U.S. growth from the Federal Reserve and evidence of a slowdown in Chinese manufacturing. The economic concerns helped push investors out of gold, down 2 percent on the day, while other commodities showed smaller losses. The sell-off also followed a move by the U.S. Federal Reserve on Wednesday to cut its growth forecasts for the world's biggest economy.