Sunday, June 26, 2011

Wow - a release of strategic oil reserves, where did that come from?

On Thursday, the International Energy Agency (IEA), which represents the interests of 28 countries, surprised investors by saying it would release 60 million barrels of oil from its stockpile over a 30-day period to ensure a “soft landing for the world economy”. The only other times the IEA released oil from its reserves was 1) after the invasion of Kuwait in 1999 and 2) after the Hurricane Katrina in 2005. The rationale behind the announcement relates to the oil production disruption in Libya and the potential negative impact to the current summer “driving seasons”.

MY TAKE: The timing of the IEA announcement was interesting – one day after U.S. Federal Reserve Chairman Ben Bernanke acknowledged that the U.S. economy had hit a “soft patch”. The bull case for the IEA’s actions is that it will help to lower oil prices- a process that should reduce one headwind facing the global economy. The bear case is that world leaders are becoming less sure about their control over economic dynamics. Perhaps the day will come when energy and economic policies seem coherent. Until then, short-term oil price fixing is
just that – short term.

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