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



Latest research

Denmark: Surprise surprise - the hike is here

A short while ago Nationalbanken announced that with effect from tomorrow, the deposit rate reads +0.05% rather than -0.1%. In the press release, Nationalbanken highlighted that capital outflow in the FX market was part of this decision. It is unclear to what extent Nationalbanken has intervened in the FX market in the current month.

Germany: improving confidence old news – next week’s inflation numbers more important

A rise in the German Ifo index, together with yesterday’s PMI numbers and an estimate that Spanish GDP growth picked up clearly in Q1 are further signs that the Euro-zone economy is picking up momentum. However, it will be next week’s inflation numbers that are more crucial in determining ECB easing expectations and thus the near-term course for markets.

Swedish Morning Briefing - Thursday, April 24

• IMF expected to endorse 17 billion dollar loan to Ukraine • Riksbank minutes from April meeting due out at 9:30 today

FI Eye-Opener: Dovish Draghi to deliver more soft words

Bonds record some gains – yields to fall further today. Euro-zone PMIs continue to show resilience – US new home sales plunge. Spain to revise its borrowing needs down. European Commission confirms Greek primary surplus – further debt relief ahead? German Ifo and Draghi’s speech ahead. Plenty of bond auctions in store.

Euro Rates Update

The latest Euro Rates Update is now available

TRY: Regime change?

Despite a clear recovery in the Turkish lira, the situation in Turkey continues to be riddled with uncertainties and the potential for market-unfriendly surprises – especially in the political arena, where Prime Minister Erdogan may be fiddling with an overhaul of the political system.

Volatility Watch

Was that a pre-warning of QE or just loose talk? The latest ECB meeting managed to both disappoint (by delivering nothing) and excite (by laying the groundwork for something big) action seekers in the market. The truth is likely in the middle, and we expect no immediate easing from the ECB. We have seen a rebound, albeit modest, in gamma vols. Early vega options (1y-2y expiries) are moving down quite quickly Overall we still see the gamma segment as cheap, whereas we’re rich/neutral on vega.

SEK Rates: SGBi auction preview

The Swedish National Debt Office will sell 1 bn SGBi 3108 (1 Jun 2022) on the 24th April

Euro area PMIs: a good start into Q2

Higher PMIs in April, both in manufacturing and the service sector. Germany strong, France weaker.

SEK FI & FX Strategy - Market Views

A re-cap of market views...

Swedish Morning Briefing - Wednesday 23 April

• Kerry warns Russia to tone down its rhetoric • Chinese PMI looks set to rise

China: Not yet spring for the PMI

China’s flash PMI rose unsurprisingly to 48.3 in April. On the backdrop of favourable policies to small companies, the improvement is likely to continue in the coming months, but PMI is likely to stay below 50 because of excess capacity and debt overload.

FI Eye-Opener: China not rebounding like it used to

Bond markets with a rather calm day after Easter. Bonds with more potential in the near term. Intra-Euro-zone spread narrowing not run its course. Chinese PMI still depressed. Downside risks to today’s PMIs. Portuguese and US auctions ahead.

Preliminary Prepayments

Preliminary Prepayments

RUB: mixture of capital outflow, Central Bank’s policy and geopolitics

RUB has been under pressure recently as tsunami of capital outflow, caused by the threat of sanctions against Russia, washed away optimists and buyers of RUB-denominated assets. The pace of capital outflow increased in Q1 2014, reaching unimaginable $51 bn. (compared with $62.7 bn. in 2013). The volatility stays high on the Russian markets and the rouble remains focused on geopolitics.

Sweden: March Labour Force Survey better than it seems

Unemployment remained unchanged at 8.1% in March (seasonally adjusted). This was above forecasts at 8.0%. However, employment rose more than forecast and was up 0.3% m/m after an uptick of the same magnitude in February. Thus, the higher than expected unemployment reading in March is (once again) explained by unexpected strong growth in the labour supply, +0.3% m/m.

Swedish Morning Briefing - Tuesday 22 April

• Deal clinched during Geneva meeting • Ingves says deflation not likely

FI Eye-Opener: Portuguese bond auctions back

US Treasuries with a beating ahead of the Easter. Some gains ahead for bonds today. US existing home sales out today – Euro-zone flash PMIs later. A flood of auctions on the agenda already today. Portugal to resume its bond auctions. Fresh cash injection to boost French bonds this week.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Thursday 17 April

• Separatists in Donetsk plan for a local referendum • A summit in Geneva to discuss the crisis in Ukraine