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Written by Sumit Roy  |

June 29, 2011

Crude Oil Report: Oil Recovers Post-IEA Decline As Traders Reassess Fundamentals

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WTI has recovered the entire decline that followed the IEA’s surprise announcement to release 60 mmbbl of strategic oil reserves.

The Department of Energy reported this morning that in the week ending June 24, 2011, U.S. crude oil inventories decreased by 4.4 million barrels, gasoline inventories decreased by 1.4 million barrels, distillate inventories increased by 0.3 million barrels and total petroleum inventories decreased by 0.3 million barrels.

Crude oil prices—which were already higher ahead of the report amid broad-based buying across financial markets—added to their gains after the report. Indeed, this week has been a very positive one for crude oil thus far. Prices have recovered strongly from last week’s losses, which were inspired by a surprise IEA decision to release 60 million barrels of oil from global strategic petroleum reserves.

In fact, at nearly $95, WTI is back to where it was before the IEA announcement, while Brent at $112 is only $2 lower.

Today, the parliament in Greece approved a package of austerity measures that ensures the country will avoid defaulting on its debt anytime soon. That has helped all risk assets, including crude.

But it’s not only the Greek news that is boosting oil; traders are also reassessing last week’s IEA action, with some coming to the conclusion that the move isn’t very significant in the bigger picture.

In total, IEA member countries control about 1.6 billion barrels of strategic reserves, so 60 million barrels only represents about 4.3 percent of that. Meanwhile, commercial petroleum inventories in IEA member countries total about 2.5 billion barrels, so 60 million barrels represents about 2.4 percent of that. Really, all that’s going to happen on net is that crude will be transferred from strategic reserves to commercial reserves—an inventory transfer in other words. Importantly, no new production is coming to market.

And that’s the bigger issue. While dumping 60 million barrels on the open market over one month obviously has a depressing effect on immediate oil prices as we’ve seen, the bigger concern continues to be disruptions to production, particularly Libya’s 1.6 mmbbl/d. And indeed, the IEA pointed to this specifically as to why they took the action they did.

The Libyan war has removed about 132 million barrels of oil from the market thus far, so this release will seek to replace a little less than half of that. But each day that the conflict continues, another 1.6 mmbbls will be lost. The market must also contend with the steep seasonal increase in demand that is to come in the third and fourth quarters of this year.

Finally, there is concern that Saudi Arabia—which pledged to increase its production unilaterally to help fill the gap left by Libya—may not raise its output as aggressively after the IEA move.

Going forward, the outlook for the global economy will likely reassert itself as the biggest driver of crude oil prices. In that regard, bullish signs are emerging after this week’s steep rally in world stock markets and the resolution of the Greek debt situation.

Turning back to today’s EIA report, total petroleum inventories declined by 0.3 mmbbl last week against a typical 3.7 mmbbl build. In turn, the surplus versus the five-year average fell to 13.3 mmbbl, or 1.3 percent.