DCSIMG

Emergency stock release to curb oil prices – for better or worse?

Thina SaltvedtHigh and increasing oil prices could jeopardise the economic recovery and reduce the chances of President Obama being reelected. The sharp upswing in oil prices is also a major concern for other net oil-importing countries.

The Brent oil price has increased by 20% since mid-December as tension continues to escalate between the West and Iran, with sharper rhetoric and increased threats of military confrontation in an area where 30% of the world’s oil production is taking place. In addition, a number of supply interruptions in oil-exporting countries such as Sudan, Yemen and Syria have sparked concerns over global oil supplies.

Market players are now speculating in a new coordinated release of crude stockpiles by the US, the EU and other large oil importers if oil prices continue to rise. Democrats urged Obama last week to tap the nation’s Strategic Petroleum Reserves (SPRs). US Treasury Secretary Timothy Geithner indicated last week that there was “a case” for releasing crude from the country’s strategic petroleum reserves. But will a new strategic stock release really work and does a high oil price in itself qualify for an emergency stock release?

First of all, one lesson learned after last year’s coordinated emergency stock release of 60m barrels of petroleum by the International Energy Agency’s (IEA) 28 member countries that it is difficult to change the market’s expectations about the future supply/demand balance and thereby price expectations with short-term solutions to what the market sees as more medium-term challenges. The effect of the stock release was short-lived. Oil prices plunged by USD 9/barrel to USD 105.12/barrel within two days, but were back at the pre-release level within 14 days. We expect a new coordinated stock release will have a short-lived effect, as continuing political tension, especially as the tension between Iran and the west is growing, will drive up the risk premium and thereby oil prices again.

Second, should we override the market’s own mechanisms to adjust to the current market conditions? Higher oil prices will dampen oil demand growth.

Third, the recent oil price spike has to a large extent been driven by the EU/US sanctions and oil embargo. While both the US and EU sanctions will be fully enforced on 1 July, the US and EU sanctions appear to be having an earlier-than-expected impact on Iranian oil exports. The recent oil supply tightening and thereby upswing in oil prices can to a large extent be explained by self-imposed market interruptions. Does this qualify for the use of the emergency stocks?

The terms to use the emergency response tool vary. According to the US Department of Energy, “The Strategic Petroleum Reserve exists, first and foremost, as an emergency response tool the President can use should the United States be confronted with an economically threatening disruption in oil supplies”. The US has released crude oil 17 times since 1985, 4 times as test sales and emergency drawdowns, 11 times as emergency agreements with private companies and 3 times as non-emergency sales.

In contrast, a coordinated IEA stock release has happened on three occasions only, the Gulf war in 1991, Hurricane Katrina in 2005 and after the Libyan oil supply disruptions last spring. According to the IEA, the “collective response actions are designed to mitigate the negative impacts of sudden oil supply shortage by making additional oil available to the global market through a combination of emergency response measures, which include both increasing supply and reducing demand”. “Although supply shortages may bring about rising prices, prices are not a trigger for collective response action, as these can be caused by other factors and the goal of the response action is to offset an actual physical shortage, not react to price movements”.

It is questionable if the current situation qualifies for the release of emergency stocks as the market at the moment is still fully supplied, a supply shortage as a result of sanctions/embargo can hardly be sudden or unexpected and higher prices are not a trigger for action. An event that could trigger the use of the emergency stocks is, for example, if Iran closes the Strait of Hormuz as 20% of the world’s oil passes through the Strait.

Get commodities research via RSS

Keywords

,

Latest research

Swedish Morning Briefing - Wednesday 23 July

EU to limit Russian access to capital markets Minutes of BoE meeting due at 10.30

Euro Rates Update

The latest Euro Rates Update is now available

FI Eye-Opener: Some easing in Euro-zone deflation threat

German yields rebound – US Treasuries end with a small rally. Core bond to remain supported today. Equities with clear gains. EU continues to advance with small steps with Russian sanctions. US inflation pressures remain limited for now. At least some easing in the Euro-zone deflation threat. New 30-year benchmark from the EFSF. BoE minutes and French business confidence ahead.

US: Core consumer prices rise less than expected

The overall trend of inflation remained subdued in June

Morning Briefing - Tuesday July 22

Japanese government cuts GDP forecast Pro-Russian separatists hand over black boxes to Malaysia

FI Eye-Opener: Searching for inflation

Core bond yields edge further down – geopolitical tensions continue to support bonds. Equity markets feeling pressure. More sanctions on Russia in the pipeline. US inflation pressures finally picking up? Belgium to sell longer bonds.

Morning Briefing - Monday July 21

Growing pressure for further sanctions against Russia Israel steps up ground offensive in Gaza

While you were busy...

If you are just back from holiday, here are a few bullets on what happened while you were busy…

FI Eye-Opener: Markets too upbeat on Europe?

Bond yields end a bit higher, but near-term upside still limited. US equities with a clear rebound – resistance in sight. Money market rates rise on higher LTRO repayments. More warnings on markets being too optimistic. US inflation numbers and Euro-zone PMIs ahead. Supply action easing – more coupon and redemption payments ahead.

FX: the EUR trap

Is Europe next Japan? Hopefully not. ECB and releveraging implications for EUR.

Week Ahead: 19 - 25 July 2014

US CPI inflation will be out on Tuesday . China and the Euro-zone will present PMI figures. On Friday the German Ifo indexes is released. The BoE will deliver minutes from the July meeting and UK GDP figures will be out on Friday

Swedish Morning Briefing - Friday 18 July

Passenger plane downed over eastern Ukraine Israel launches ground offensive in Gaza

FI Eye-Opener: Increasing tensions to push German yields to new lows

Bonds continue to rally – yields in several semi-core countries hit record lows. Equities suffer a beating. Chinese home prices continue to fall. Geopolitical concerns take centre stage ahead of the weekend. German 10-year yield about to fall to new lows. Mixed US data – Bullard sees early rate hikes. No ABS purchases from the ECB for a long while. US consumer confidence and euro debate ahead.

Bulgaria: Two bank runs and a bankruptcy

Bulgaria experienced a run on two of its biggest banks in late June, leading the central bank to close the fourth-largest bank in early July and start criminal investigations against several people. Moreover, the bank runs may have been the final push for the government to call early elections and have pushed the country into talks with the ECB to take over supervision of its banks and with the EBA to review the central bank’s banking supervision. Banking sector risks are obviously elevated!

Bonds: This bubble will keep growing

It seems everywhere you look nowadays, you see a bubble. That is not true of course, but based on many headlines, you could be fooled. The bond market is no exception, and it has received its fair share of bubble talk. If it is a bubble, it will keep growing in the near future.

Turkey: 50 bp cut this time

A 50 bp rate cut this time. More could come if risk sentiment remains decent and the TRY does not weaken further.

RUB: again under pressure after US and EU sanctions

RUB is again under pressure after US imposed sanctions on Russian companies.

Swedish Morning Briefing - Thursday 17 July

No new foreign policy chief after EU summit US and EU boost sanctions against Russia

FI Eye-Opener: Another round of sanctions

Bonds continue to see strong demand. Portuguese bonds rally hard. Core bonds to continue to perform today. European equities with considerable gains yesterday. Fresh sanctions on Russia taking a toll on already weak economies. EU leaders fail to agree on top posts. Final Euro-zone inflation and US construction data ahead. Spanish and French supply.

Sweden: Riksbank’s minutes soft as expected

Today’s minutes did not add much new information regarding the reasons for the rate decision. As indicated by the rate path, the discussion confirmed that 0.25 is not a floor for the repo rate.