IEA Fires Warning Shot at Oil Speculators


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.

Oil prices were reaching a bottom by midday trading, and analysts said they could recover to the previous session's closing prices if the dollar were to weaken.

Although the IEA's action sent a clear signal to the markets, some have questioned the wisdom of the move. "This is a temporary fix," says Vince Lanci, managing partner at Echobay Partners. "If a real crisis were to pop, they wouldn't have the bullets that they're spending right now."

Summit Energy analyst Matt Smith adds "given the recent weak global economic data, the economic fears spurred on by European sovereign debt worries, and the bearish response from Saudi Arabia's announcement to increase production to 10 million barrels a day, it seems a strange time for the IEA to make this announcement, given that prices have been moving lower already since the Organization of the Petroleum Exporting Countries meeting a few weeks ago."

Brent crude oil for September delivery was falling $6.74 to $107.02, while West Texas Intermediary light sweet crude oil for August delivery was falling $4.67 to $90.74, off its intraday low of $89.69.

Key Energy Services ( KEG) was slumping by 4.1% to $16.14, Parker Drilling Company ( PKD) was plummeting 7.1% to $5.52, Diamond Offshore Drilling ( DO) was tumbling 3.1% to $66.55, Helmerich & Payne ( HP) was lower by 2.9% to $59.77, Petroleo Brasileiro ( PBR) was falling 3.8% to $31.61, China Petroleum & Chemical ( SNP) was down 0.3% to $93.22 and CNOOC ( CEO) was down 1.9% to $225.95.

Analysts expect that oil demand will be critically close to oil supply by the winter of 2011 and in 2012.

>>Search for Highest Dividends by Rate or Yield
More on Earnings
Today's Top Earnings
Earnings Calendar

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.

>To follow the writer on Twitter, go to Andrea Tse.

>To submit a news tip, send an email to: tips@thestreet.com.
Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.