US, UK, France Considering Crude Release

The chatter is heating up that the US, the UK, and France are considering a co-ordinated release of crude oil from their strategic reserves. Last year during the turmoil in Libya, the International Energy Agency co-ordinated an April release of 60 million barrels from strategic reserves, half of which came from the US.

That release did, in fact, push crude prices down, but the relief was only temporary. By October, prices were rising again. It can be said that the move worked — sort of — but the situation is considerably different this year.

The loss of Libyan crude was considered to be temporary by the crude market, and that turned out to be the case. The current situation reflects an overall scarcity in the market. Supply simply cannot meet demand. In a market for a manufactured product, the imbalance is usually corrected by producing more. That is only barely possible in the crude market, and only one producer — Saudi Arabia — has the ability to bump up production.

A release from strategic reserves at this point won’t make much difference because the market knows that the supply increase is not only temporary, but that the increase itself can’t be large enough to tamp down prices.

None of that means that the US, the UK, France, and others won’t go ahead with the release. Politics may well trump analysis again, as always. A strategic release may have some impact on speculation, but the essential supply-demand imbalance won’t change.

Paul Ausick