IEA sends a clear signal of mistrust to OPEC

Nordea Commodities Research:

Oil prices fell by around USD 4/barrel following a press release by the IEA saying that the 28 IEA member countries have agreed to release 60 million barrels of oil in the coming months in response to the ongoing disruption of oil supply in Libya.

According to the press release the IEA will make 2 million barrels per day available from the emergency stocks over an initial period of 30 days. This is the third time the IEA has coordinated the release of the emergency stockpiles since the organisation was founded in 1974. The first time the agency released emergency stockpiles was in 1991 during the Persian was and hurricane Katrina in 2005.

The emergency release is meant to help the market under the peak summer season in July/August when oil demand seasonally increases. Demand is anticipated to rise over the summer as the refineries returned to service after routine maintenance. In addition, we expect the market will tighten further as the reconstruction after the earthquake in Japan will increase the demand for oil and oil products to make up for the fall in nuclear power to produce electricity and power shortage in China in the peak months for electricity consumption in July/August will boost the use of diesel aggregates for power generation.

IEA sends a clear signal of mistrust to OPEC after the cartel failed to agree to increase production at the meeting two weeks ago. Although the Saudi Arabian oil minister said after the meeting that the country will increase oil production in an attempt to lower prices, the IEA has indicated that there is not enough time for OPEC to increase production and ship the oil the market to meet the peak summer demand. In addition, Saudi Arabian heavy oil cannot fully compensate for the lost Libyan light sweet crude oil, so the IEA is concerned that there could be a squeeze in the market for some grades of oil. So far, the unrest in Libya has removed around 132 mb of light sweet from the market and we expect that most of the Libyan oil supplies will be locked in for months.

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