Home US throws down the gauntlet to OPEC

US throws down the gauntlet to OPEC

On a day when Europe was again convulsing with the question of how to respond to the sovereign debt crisis, it was the decision of the International Energy Agency (IEA) to release 60m barrels of oil which really captured the attention of investors and traders. Brent crude, which yesterday morning was trading up at $114 a barrel, fell sharply in response to the announcement and is now trading at $108, having dropped below $106 briefly yesterday. In the last two months, Brent crude has lost $20.

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Following OPEC’s contentious meeting two weeks ago, when the oil cartel could not agree to increase production, the IEA’s response is very provocative. The superficial justification for the IEA move is that Libyan production has ground to a virtual halt over the past couple of months but, to be frank, this is clearly just a ruse for the true motivation, which is to bring down the crippling price of oil. From a political perspective, President Obama has stepped in to allay growing calls for him to do more to support the economy. America will contribute one-half of the IEA’s 60m release of oil reserves – just a drop in the ocean given the immense 727m barrels currently held by the Strategic Petroleum Reserve.

The move by the IEA is unprecedented. It represents only the third time that the agency has released stockpiles – the first was in 1991 during the Persian Gulf war, followed by another release after Hurricane Katrina in 2005. Although the IEA decision will be supported by Saudi Arabia, other members of OPEC such as Iran and Venezuela will not be especially pleased.

At a time when both the developed and developing world are suffering lower growth and higher inflation as a result of high energy costs, the IEA’s move has symbolic rather than practical significance. It turns out that 60m barrels represents 2/3 of the world’s consumption of oil on any given day. Even so, lower energy prices over coming months will provide all economies with a fillip for the second half of this year.

Michael Derks, Chief Strategist

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