Why now?

There has got to be more to last weeks move by the IEA to release an additional 60 million barrels of oil than meets the eye. At the time of the announcement, WTI crude oil was sitting at about $95 – approximately 20% beneath its recent peak. A very big price adjustment had already been made. Had oil been trading at $120, it would be more understandable. Its only the 3rd time ever the IEA has tapped into their reserves: the first time was during the Gulf War, next was after hurricane Katrina, and now a third time. Why?

· One of the reasons given, is the production loss due to Libya. This doesn’t make much sense, as the story is a good couple of months old. Why act now? And in any event, currently the production lost due to Libya has been offset by the loss of demand from Japan post tsunami.
· Another proposed reason, is to clampdown on the speculative longs. Again, this is unlikely, as there were far more speculative longs a number of weeks ago when the price was $20 higher, and there was no “imminent” correction. Plus, any speculative longs out there must have nerves of steel, as the recent macro data is painting a picture of a world in which China, the US, Europe and Japan are all slowing down.
· It’s unlikely too that the reason is to stimulate the economy, be it the US, China or Europe. The 60 million barrels would last for about 16 hours of global consumption- hardly enough to make any sort of impact on global supply and lasting impact on price. Indeed, you will probably find China licking their lips in glee, at the ability to buy up every single one of those barrels for their own reserves.
· The IEA’s strategic reserves are specifically held for “emergency situations”. The IEA has no choice but to replenish the released reserves at some future time. I.e. additional price pressure at some future point.

In my mind, the release of the oil should be considered the equivalent of a global coordinated rate cut. In the long run, oil is an inflationary headwind but the elevated prices at the moment is more of a consumption tax and price shock. Last week’s events may merely be temporary) but I think they will serve a psychological purpose. However, the timing of the announcement, despite being odd as to the necessity, is also a little bit on the short sighted side. As reported 2 weeks ago http://goldrockthoughts.blogspot.com/2011/06/crude-to-march-higher.html
OPEC had their worst ever meeting, and there is already evidence of a strong rift within the OPEC camp. Since that meeting, Saudia Arabia have seemingly been cast into the sidelines, and OPEC themselves do not seem to consider the Saudi’s as a part of OPEC.

Where’s the evidence? OPEC and the European Union are due to hold an energy summit in Vienna Monday that will be the first official meeting of producers and consumers since the IEA's move, and will provide a platform for OPEC members to express their disquiet over the stocks' release. However, OPEC's biggest player, Saudi Arabia, won't be present. There has to be at least the potential for the remaining OPEC countries to counteract the IEA’s move and cut output to offset the increased supply. A war in which OPEC cuts production and IEA offsets that with the release of strategic reserves, is not a situation that the global economy would like to get into right now. (Besides for China of course, who would happily build up its own strategic reserves).

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