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IEA Fires Warning Shot at Oil Speculators

Stocks in this article: KEG PKD DO HP PBR SNP CEO


NEW YORK ( TheStreet) -- The International Energy Agency's decision to release emergency oil reserves was a warning to oil speculators and wasn't expected to materially increase supplies to the market.

"I think the IEA is saying that first and foremost 'we are extremely concerned' about the impact of high oil prices on global growth," says Addison Armstrong, Tradition Energy's senior market research director. "And I emphasize, 'extremely.'

Analysts such as Tom Kloza, chief oil analyst at the Oil Price Information Service, says the volatile price action taking place "hasn't been the province of the commercial side of the business" in a long time. Rather, they are attributable to institutional money managers.

The IEA has only released emergency reserves twice since it was established in 1974. The first time was after the first Gulf War in 1991. The second time was after Hurricane Katrina in 2005. Both releases were smaller than the current one. Still, the IEA's announcement of the release of 60 million barrels of oil in the coming month barely makes up for the amount that has been taken offline since the Libyan civil war began.

As Armstrong explains, dividing 60 million barrels into the roughly 1.4 million barrels of oil a day lost to the Libyan Civil War equates to only about 43 days of Libyan output. In a market that consumes more than 85 million barrels of oil a day, 60 million barrels is really "the proverbial drop in the ocean," says Armstrong.

"In my view, this is less about long-term supply and more about the long-term message being sent," says Kloza.

Indeed, there was an initial knee-jerk reaction to the IEA's announcement, especially in Brent crude, which has been the global benchmark for oil prices, including that of the lost Libyan output -- priced off of a differential to Brent. But as the announcement flushed out speculators, those who initially thought the dip would be a good buying opportunity had to think twice.

"Speculators will try to buy the dips," says Armstrong. "But if I were a speculator, I would be concerned that this may be first move of several that IEA and U.S. Department of Energy may make." The U.S., a member of the IEA, will be releasing 30 million barrels of oil from its strategic reserves as part of the IEA's 60 million barrel release.

"There was a lot of profuse bleeding among those who had lots of money in Brent today," says Kloza.

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