Defending release of oil from strategic reserves

Answering the call

The market was screaming for action and the International Energy Agency acted. Despite the critics of the surprise release of 60 million barrels by the US and the other 27 members of oil consuming nation’s oil from the International Energy Agency, the truth is they made the right move. It was clear that if you listened to what the market was saying it was telling you quite clearly that the combination of sub-par North Sea production and the war in the Middle East was causing a serious enough disruption to warrant some help from the International Energy Agency.

The market, as judged by the record breaking spread of Brent Crude over the West Texas Intermediate, showed the refining market was broken and the International Energy Agency was correct in trying to fix it. This is one of the reasons that strategic reserves are there and that is to make up for major disruptions of supply by things like acts of God and by acts of war. Not to mention that as the IEA says disruptions that undermine the fragile global economic recovery.

Believe it or not this move was just not done to move price but to replace lost supply due to a major disruption because of war. This is a disruption that constrained the supply of light sweet crude that was causing a major headache not only in Europe but was starting to impact supply in the United States. East coast supplies into New York harbor have been falling, causing a spike in gas prices and impacting US consumers as Brent crude started to spin out of control.

While oil supply in the US is at the highest level since 1980, because of the war in Libya, supplies in Europe are at a five year low. Every day that Libya is off line 1.5 million barrels of high quality crude from the marketplace. Don’t get thrown off by the argument that 60 million barrels is not enough to make a difference because it would just about cover US demand for the weekend, this is about quality not quantity.

While Saudi Arabia is pumping the most oil they have in 30 years to try to fill the void, the quality of their crude is not going to help the European refiners that can’t refine the sour crude the Saudis are putting out there. The truth is that an influx of light sweet crude into the market place could bridge the gap until North Sea production can get caught up. This should not only beef up supply on the East Coast of the United States, but also Europe as well.

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