Emergency crude oil stock release – more show than show-stopper!

On 23 June the IEA announced its member countries were releasing 60 million barrels of oil from emergency stocks in response to the ongoing loss of Libyan oil production and to combat the negative effects stubbornly high oil prices were having on global economic growth. This will lower oil prices in the short-term, however, longer-term a structural bull market in oil remains intact.

Putting the move in perspective

Whilst the move by the IEA in itself may appear drastic given it has only occurred three times in history, see chart 1 below, the amount released remains a ‘drop of oil in the ocean’ when looking at global consumption. The Energy Information Administration (EIA) estimates global crude and liquid fuel consumption at 86.7 million barrels per day (m bb/d ). Therefore the emergency release does not even represent a single day of consumption. 

The move has had, and in the short term will continue to have, a negative affect on oil prices. But it does little to address growing supply concerns. Further, with the EIA forecasting consumption increases of 1.7 m bb/d, OPEC supply decreasing by 370k bb/d and Non-OPEC supply increasing by merely 590k bb/d the quandary becomes evident.

Also, OPEC’s supposed spare capacity largely relies upon Saudi Arabia, as highlighted in our previous theme OPEC’s Quota indecision might not be that bad after all, with approximately 3.5 m bb/d of production capacity. Historically, however, it has produced a maximum of 9.7 m bb/d leaving many to question whether the remaining capacity is achievable.

Chart 2 highlights that despite previous interventions, similar to that of last week, the oil price has continued its northerly summit. Furthermore, we have previously highlighted potential oil company investment candidates in our theme the link between the cheapest oil companies and their reserves. 

Net Net – Net Long!

The 'shock' move by the IEA highlights the concern surrounding stifling economic growth and the necessity to fight inflation. But it also highlights that the group has come little way to solve the broader supply/demand concerns that will drive future oil prices higher.