Leading oil-consuming nations, including the UK and US, announced the release of 60 million barrels of oil from emergency strategic government stockpiles yesterday, in an attempt to push down crude prices and underpin the global economy.
The 28-member International Energy Agency said it would release 2 million barrels per day (bpd) over 30 days to fill the gap in supplies left by the disruption to Libya's output.
The move – only the third such emergency release in the IEA's 37-year history – took the markets by surprise and pushed the benchmark price of Brent crude down $8 to $105.72 a barrel, while in New York crude fell $5.22 to $90.19. The volume of Brent traded hit a record million lots in London.
The US is to provide half the volumes from its huge, 727-million barrel crude reserves – about 1.5 days' worth of US consumption. The UK is providing 3m barrels as part of Europe's pledge to supply 30 per cent of the total, while the rest is coming from Pacific OECD nations. The IEA said it would review the need for a further release in a month's time.
The strategic stockpiles were built up in the wake of the 1970s' oil crises to provide emergency reserves if oil supplies are ever interrupted.
But oil-producing nations reacted angrily to the announcement, which comes after the Opec cartel failed to raise production at the start of the month and despite assurances from Opec's biggest producer, Saudi Arabia, that it would lift supplies unilaterally.
"There is no reason to do this," said a senior Gulf Arab Opec delegate. "The market is not short of supply. Kuwait and Saudi Arabia have been raising production but there have not been many buyers. The IEA is just playing politics with the US."
The IEA and countries involved in the release of the strategic reserves, however, pointed to the "fragile global economy" and stressed that the move was to replace output lost from Libya – which was producing 1.2m bpd before the rebellion which brought its oil industry to a standstill.
In Britain, the Chancellor, George Osborne, said: "Families have been hit hard by the big jump in the world's oil price. Events in the Middle East and North Africa have disrupted supply and contributed to the price spike. So we've been working closely with our international partners to take action with today's release of oil stocks."
With world oil stocks at comfortably high levels by historical standards, oil analysts were divided on whether prices would fall further.
"I think the IEA is trying to act like a central bank," Dominick Chirichella at the Energy Management Institute said. "We may see (US) oil trading in the $80s very soon."
But Carl Larry at the broker Blue Ocean said prices might not fall much further. "This is an economic stimulus... in oil dollars," he said.
Either way, the move is highly controversial, with President Obama having previously insisted such interventions should only be made to cope with supply shocks.
While the Libyan crisis might be considered such a shock, the conflict there has now been running for four months and the oil market appears to have settled of late.
John Kilduff, an energy analyst at Again Capital, said: "The move represents a reach by member countries for the remedy of last resort to high prices. The energy price spike is being cited as the reason for the economic slowdown and this is a reaction. The Libyan outage provides good cover."Reuse content