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Germany, Italy May Oppose Second Oil Reserve Release

Friday, 15 July 2011 02:40 PM

Germany and Italy are expected to oppose any second release of emergency oil reserves by the International Energy Agency, which needs the backing of all 28 members if it is to pour more oil on a volatile crude market.

The IEA is expected to confer with its member countries by July 23 to decide whether to draw further on emergency oil stocks after its announcement last month of a 60 million-barrel release, only the third such move in its history.

"Germany and Italy were not much in favor of the decision back in June," the French government source said. "While the decision was unanimous not all were committed."

Asked whether they would resist this time, the source said: "This is likely."

Whether the IEA or its member states will intervene again in the hopes of buffering a fragile global economy is the subject of intense speculation in oil markets.

European sources say that despite resistance from Italy and Germany, a second injection of liquidity has not been discarded offhand.

The United States has, on rare occasions, dipped into its stocks unilaterally. And the IEA's own oil market report this week forecast a gap in global oil supplies for the third quarter, providing potential justification for more oil.

Bob McNally, a former White House energy official who runs energy consulting firm Rapidan Group, which accurately predicted the first measure, says U.S. officials are likely to seriously consider pushing the IEA to release more oil.

"The odds of another release are much higher than the oil market expects," he told Reuters.


France would not lead any opposition, but neither would it press for a further release, the French government source told Reuters.

A German government official Friday said not all the reserves released so far had been used when asked whether the IEA should add further oil to the market.

The official was noncommittal, however, about Germany's stance, saying it was waiting for the IEA's opinion, and Britain took a similar line.

"We will wait for the IEA to conclude their analysis at the end of July and they will make a decision in light of that," said Cameron Ramos for the Department of Energy and Climate Change.

There could be objections on the principle that emergency reserves should not be used for intervening in markets.

"This is not an operation (the oil stock release) that can be repeated indefinitely," said a European diplomatic source.

"This does not mean the move will not be repeated but this is an operation which is and must remain exceptional. Otherwise it loses its value. It is not a tool for markets."

Even though a unanimous decision is needed for a release within the IEA framework, the United States, which provided half of the initial supply injection, could act unilaterally as it has done via SPR loans a handful of times in the past.

But doing so would require it to take time away from another even larger crisis. The Obama administration's first decision to release oil from the reserves was coordinated by Gene Sperling, his top economic advisor, who has since been deeply involved in talks to avert a looming U.S. government default.



The French government source said Italy's opposition to a further supply release was in part based on its historic relationship with Libya, while analysts have said Germany's appetite for further action could be tempered by its relative indifference to high oil prices given the strength of its economy.

The IEA has presented its use of strategic stockpiles primarily as a response to the supply shortfall created by the loss of OPEC member Libya's barrels to civil war.

Some analysts, however, have said the tactic was designed to lower oil prices at a time of global economic weakness and there was also a political element in the run-up to the U.S. presidential election.

They say it differed from the two other releases in the IEA's 37-year history, which were immediate responses to sudden rather than ongoing supply disruption.

Immediately after the June announcement, oil prices dropped by around 6 percent, but they quickly bounced back and Brent was trading above $116 a barrel Friday.

A monthly report from the IEA this week "took a resolutely positive view" of its action so far, which it said had narrowed the price gap between high-quality, easy-to-refine oil and heavier, more sulphurous grades -- potentially providing an argument to do nothing further for now.

But the monthly market report also signalled a continued supply gap of around one million barrels per day (bpd) between the amount of oil the Organization of the Petroleum Exporting Countries is pumping and the demand for its crude.

In addition, it said leading exporter Saudi Arabia's domestic use of fuel to generate power was likely to hit record levels, averaging nearly 600,000 bpd.

Higher domestic demand would limit the amount for sale on international markets from a rise in Saudi oil production, which a senior Gulf OPEC delegate said hit around 9.8 million bpd in June.

"They (the IEA) have given themselves justification to do just about anything they want. I'm sure it will be a lively debate internally," said Mike Wittner, an analyst at Societe Generale who previously worked at the IEA.

He thought, however, the most likely outcome of next week's 30-day review of the IEA's emergency reserves release would be a statement saying the agency would continue to monitor the situation.

"It's hard to pull the trigger again on another release when you don't know how much of what's already been released has been taken up," he said.

Analysts still rule nothing out, noting the first reserves announcement was a shock to oil markets, even if the price impact was not sustained.

If there is a second release, it would likely be announced by the end of July so that the barrels could be primed to hit world markets before the end of the third quarter, a period when IEA has warned of potential supply shortages, Rapidan's McNally said.

"While it's not a foregone conclusion, it's a good possibility," he said. "I think from the beginning there were always two bullets in the chamber. They've only used one so far."

© 2019 Thomson/Reuters. All rights reserved.

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Germany and Italy are expected to oppose any second release of emergency oil reserves by the International Energy Agency, which needs the backing of all 28 members if it is to pour more oil on a volatile crude market. The IEA is expected to confer with its member countries...
Friday, 15 July 2011 02:40 PM
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