IEA announces release of emergency fuel stocks

Oil around $107 impact of IEA release fades

Oil’s sharp sell-off paused on Friday as the impact of the announcement of emergency fuel stocks from consumer nations faded.

Brent crude futures eased 54 cents to $106.72 a barrel by 1308 GMT, while US crude futures recovered 24 cents to $91.26.

Brent fell around six per cent on Thursday after consumer watchdog the International Energy Agency (IEA) announced the release of 60 million barrels of government-held stocks over the next 30 days.

The extra oil - only the third emergency release in the IEA’s 37-year history - will increase global supply by some 2.5 per cent for the next month.

Leading commodities banks JP Morgan and Goldman Sachs cut their oil price forecasts following Thursday’s IEA announcement, but Bank of America Merrill Lynch kept its forecast for the second half unchanged at $102 a barrel.

The biggest impact yesterday was on the spreads between futures contracts as the market reacted to extra availability of extra crude for immediate delivery - eliminating the premium for spot barrels versus crude for delivery at the end of the year.

Other analysts and investors said physical oil could be offered at discounts, piling further pressure on the international market, although they said there was uncertainty about the longer term implications.

Saudi Arabia, the world’s leading exporter, has yet to make any comment on the release.

After the Organization of the Petroleum Exporting Countries last month collapsed in disarray without reaching a supply deal, Saudi Arabia had pledged to produce whatever the market needed.

“Saudi Arabia will be crucial - will it stick to its promise to increase its output to 10 million barrels a day or not?” asked Carsten Fritsch, an analyst at Commerzbank in Frankfurt. “If they don’t, then the IEA decision will have backfired. Maybe they will scale back production in July after this stock release.”

Emergency reserves previously have been used for severe supply disruption and some analysts said using them now - four months after disruption of exports began from war-torn OPEC member Libya - amounted to a change of use.

The IEA argued the Libyan disruption, which has dragged on for months and exceeded that caused by Hurricane Katrina in 2005 when the agency last released reserves.

Analysts said for now there was adequate supply in the market and that anxiety about the fragility of the world economy was a major consideration for the IEA and its biggest member country, the United States. Final US GDP data for the first quarter came in at 1.9 per cent.

Politics in the United States, where high gasoline prices are an election issue, was also a consideration.

“The entire purpose of this is political - the object is to decrease gasoline prices during the 2011 summer driving season in North America and Europe,” said Monty Guild, chief executive of US-based Guild Investment Management.

“We predict that the effect of this sale will be unnoticeable in three months. At that time oil prices will be rising and possibly will be higher than they are today.”

Brent peaked above $127 a barrel in April this year - below the all-time high of more than $147 a barrel for US crude hit in 2008.

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