Stock release review – July 21, 2011
Frequently asked questions
Q: A month in to the IEA stock release, with crude prices above pre-release levels, how would you evaluate the success of that action?
A: The action aimed to add short-term liquidity to a global market which has lost nearly 1.5 mb/d of Libyan supply and faces a seasonal rise in demand in the third quarter. The release from the US SPR has allowed alternative light-sweet cargoes to divert to demand centres in Europe and Asia. Refining margins, though still volatile and weak on an historical basis, have nonetheless strengthened. And market structure is more conducive to normal 3Q industry stockbuilds than it was prior to the action.
Finally, it should be noted that market appetite for the government stocks made available has been greater than during the Hurricane Katrina Collective Action in 2005, and the measure has largely achieved its aims to date.
Q: Last week the OMR projected even greater tightening in the third quarter. Wouldn’t this argue in favour of extending the stock release for another 30 days?
The OMR of last week indeed foresaw an increased ‘call on OPEC crude and stock change’ for 3Q11 compared to previous issues. Gratifyingly, however, there were already signs in June that key OPEC producers are raising production significantly to help meet that rising ‘call’. In addition, the OMR reviewed industry stock levels at the end of June. As the action was announced on 23 June, none of the government stocks had entered the market yet. These stocks, some 38 mb, or 610 kb/d, will augment July and notably August supplies from other sources, and reducing the potential for a further tightening of the market.
Q: Why has it taken so long for oil from the release, notably in the US, to be made available to the market?
A: There are different stages in a release process, starting from the publication of tender documents (in the US on the very day of the announced action) to the actual delivery of the oil at a pipeline or ship a few weeks later. For the market the most important moment is the awarding of the bids, as from then on companies can schedule these deliveries into their supplies. In the US the awarding of bids started on Friday 1 July. These supplies are available close to trading and refining hubs and don’t need to be shipped over long distances.
Q: What is the envisaged time line for replenishing stocks after the release?
A: That is very much up to the provisions for replenishment legislated for individual member countries. With that said, the Secretariat has recommended to member governments to allow industry the maximum of flexibility in replenishing stocks, preferably waiting until the end of the year or beyond. Given that the action has not required any country to drop below the 90-day net-import requirement, the timing and pace of any replenishment are unlikely to be disruptive to the market.
Q: Brent has flipped back in to backwardation recently. Is that indicative of a successful stock release?
A: Despite recent developments, the prompt premium in the market has nonetheless weakened from where it was earlier in June. Rather than focusing on day-to-day or week-to-week fluctuations in prices, the IEA collective action will be judged ultimately by whether or not it gave refiners and market participants flexibility and added liquidity early in 3Q. We are encouraged to see incremental OPEC supplies now being made available and the IEA stock release needs to be seen in concert with that in helping ensure adequately supplied markets.
Q: Is it true that the IEA did not extend the release because member countries were opposed?
A: No, the decision not to seek an additional release for now was based on an updated assessment of current market fundamentals and the extent to which already committed increases in supply will play out over the coming months. So the premise of the question is not correct.
As part of the Collective Action process that was launched on 23 June, the Secretariat undertook a review of the action and assessed its market impact. The Secretariat concluded that the Action served a market need by adding liquidity and bridging the gap to additional supplies from OPEC countries. However, we also pointed out that there are a number of uncertainties in the current market situation requiring vigilance. This conclusion was communicated to member countries on 20 July and no country asked for an additional collective release. The Secretariat continues to closely monitor market conditions, and the IEA stands ready to augment the Libya Collective Action if market conditions again warrant.