Skip to content

International Energy Agency Taps Emergency Oil Reserves, Crude Tumbles

Crude oil pipes at the Strategic Petroleum Reserve’s Bryan Mound site near Freeport, Texas.

By Tom Nunlist, Associate Editor

Crude oil tumbled on futures markets Thursday after the International Energy Agency announced it would release 60 million barrels of reserve crude oil over the next 30 days, or 2 million barrels per day. The United States will be supplying half of that oil, with the rest coming from other nations among the agency’s 28 member states.

Light sweet crude for August settled down $4.39, and Brent crude on the ICE futures exchanged dropped $6.95.

The United States started the petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 oil embargo, to mitigate future temporary supply disruptions.

Surprise and Confusion

The Thursday morning announcement came as a complete surprise to oil markets, and left traders guessing as to why the decision was made.

“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” said Energy Secretary Steven Chu in a statement. However, many analysts questioned this motive.

“The logic of that is actually pretty weak,” said Tom Knight, oil analyst with TAC Energy. “There doesn’t appear to be a shortage anywhere. There is not a pressing physical need for oil to come out of the [Strategic Petroleum Reserve].”

Knight added that if it really was price, the IEA is about seven weeks too late. High prices, the result of seasonal price fluctuations exacerbated by unrest in the Middle East and other factors, peaked in May and have been steadily declining since.

Some analysts speculate the decision was politically motivated: High gas prices aren’t good any time, but especially distasteful with a pending election. Knight said there were likely many factors, including drawing down the price of Brent crude, which was still slightly high, stimulating the world economy and perhaps scaring speculative dollars out of the market.

“I don’t know how much staying power it will have [in lowering prices],” said Knight. “But it will introduce an element of doubt if governments can tap reserves without warning.”

In this respect, the decision was somewhat unprecedented. The reserve was last tapped in 2005 in response to Hurricane Katrina, 21 million barrels, and before in 1991, 17 million barrels, as a reaction to the Gulf War’s impact on oil supply. Now, if additional oil can be released without an apparent emergency, investors are exposed to additional risk.

But interestingly, Knight also noted that in these two cases, buyers of the oil were limited to specific refiners and players. This time the oil is open to everyone – investors included.

This is still guesswork. What Knight knows for sure is that oil was already headed down today for a variety of reasons including the debt crisis in Europe and a strengthening dollar. Price drops were also seen in other dollar-denominated commodities, including metals. Today’s announcement only added steam to a downward trend already in progress.

Mixed Reaction

Reactions outside the trading and finance universe were mixed. The American Trucking Associations applauded the Obama administration for the 30 million barrels it is releasing from the U.S. SPA.

“ATA appreciates the step the Obama administration and IEA have taken to relieve high oil prices,” ATA President and CEO Bill Graves said in a statement. “High fuel costs hurt trucking companies by increasing operational costs and by reducing freight volumes.”

However, Graves also called for a more permanent solution to high oil prices. He noted the 30 million barrels are only enough to supply the nation for a few days.

On the other hand, the U.S. Chamber of Commerce lambasted the administration for what it called an “ill advised” move.

“Our reserve is intended to address true emergencies, not politically inconvenient high prices,” Karen Harbert, CEO of the U.S. Chamber of Commerce Energy Institute, said in a statement.

The Chamber of Commerce, which is in favor of increased domestic oil production, said the decision was not creating a workable energy policy, and that the move was “not the signal the markets need.”

Printer Friendly Version
Email This Story
RSS
Bookmark and Share

Fuel and Oil: Related News

6/24/2011 – International Energy Agency Taps Emergency Oil Reserves, Crude Tumbles

Crude oil tumbled on futures markets Thursday after the International Energy Agency announced it would release 60 million barrels of reserve crude oil over the next 30 days, or 2 million barrels per day. The United States will be supplying half of that oil, with the rest coming from other nations among the agency’s 28 member states….
More

6/21/2011 – Diesel Prices Drop Again; Crude Levels Off with European Debt Worries

On-highway diesel prices resumed their decline last week after a slight uptick the previous week.

Nationally, prices came down 0.4 cents to land at $3.95 per gallon. The small decrease did not make up for the previous week’s bump of 1.4 cents, but is perhaps an indication of price stabilization….
More

6/14/2011 – Slight Uptick in Diesel Prices; Crude Continues Decline

After several weeks of steady decline, on-highway diesel prices experienced a modest rise last week, the first in six weeks. The national average is up 1.4 cents to $3.954….
More

6/13/2011 – DOE Predicts $102/Barrel Oil, $3.87/Gallon Diesel for 2011

Although crude oil prices dropped in early may, the U.S. Department of Energy still expects oil markets to tighten through 2012 and predicts that WTI spot prices, which averaged $79 per barrel in 2010, will average $102 per barrel in 2011 and $107 per barrel in 2012….
More

6/8/2011 – Diesel Continues Sliding; Crude Dips Below $100

The pump price of on-highway diesel continued to slide last week, dropping 8 cents nationally to $3.940 per gallon….
More

6/1/2011 – Diesel Continues Falling; Crude Once Again Rising

On-highway diesel prices continued falling last week, although not quite as steeply as the week before.

According to the Energy Information Administration, the national average price fell another 4.9 cents to $3.948. A week earlier prices dropped 6.4 cents nationally. Diesel fuel is still nearly a dollar more expensive than this time last year….
More

5/24/2011 – Diesel Continues Fall; Oil Drops Due to Strengthening Dollar

On-highway diesel prices fell by 6.4 cents nationally, an even larger decrease than last week. National average prices are once again below $4 per gallon, but just barely at $3.997….
More

5/17/2011 – DEF Transition Going Smoothly, Air1 Executive Says

With 15 months of experience since the EPA 2010 emission standard took effect, diesel exhaust fluid supplier Air1 sees the market for its product developing as expected.

In the first year after the standard, the North American market for DEF was about 14 million gallons – most of it distributed in small containers sold off the shelf, said Chad Dombroski, director of Air1, which supplies DEF produced by Yara North America….
More

5/17/2011 – Diesel, Oil Prices Drop

Diesel prices dropped for the second week in a row, down 4.3 cents nationally to $4.061 per gallon, as crude oil prices fell to a two-month low Monday….
More

5/12/2011 – Pulse of Commerce Index Falls 0.5 Percent in April


The Ceridian-UCLA Pulse of Commerce Index fell 0.5 percent on a seasonally and workday adjusted basis in April, marking a continuation of the see-saw economic performance experienced over the past 12 months….
More

JOIN OUR NEWSLETTER
We'll deliver tax strategies to your inbox from our CPA firm.
We hate spam. Your email address will not be sold or shared with anyone else.