On its face, the June 23 announcement by the International Energy Agency (IEA) that its member countries would release 60 million barrels of crude oil and petroleum products from non-commercial strategic reserves into oil markets represents a tangible, transparent and precisely measured addition to world supplies over a clear, predictable time frame. In the United States, the identity of the successful bidders is well publicized, as are the amounts of oil they plan to acquire and at what price. But for all the certainty surrounding the IEA announcement, how does one go about measuring its market impact? This is a challenging task, as the oil market involves a great variety of factors, many of which could be potentially affected by the release in different ways. Assessing the true impact of the release would theoretically entail comparing post-announcement market conditions not only to preexisting ones, but also to what the market would have looked like had the announcement of releases not occurred. Breaking down potential effects into key components might bring some clarity to this question.
The simplest way of assessing the market impact of the release of oil from strategic storage is to consider the makeup of the barrels on offer and the response of potential buyers. The plan announced by the IEA entails making 60 million barrels of emergency stocks available to the market in 12 IEA member countries. The U. S. Department of Energy Office of Petroleum Reserves reported apparently successful offers for the purchase of a total of 30.6 million barrels of sweet crude oil at an average price of $5.58 per barrel below the price of Louisiana Light Sweet crude oil at the time of delivery. The crude oil is scheduled to be delivered in August, although purchasers may be able to take delivery during July if logistical arrangements can be made (additional details on the U.S. sale are available from the Strategic Petroleum Reserve Project Management Office). Japan and Korea will release a total of 11.4 million barrels of crude oil and products to the Asian markets and 9 European countries will release a total of 17.8 million barrels of crude oil and refined products.
The release responds to the ongoing disruption of oil supplies from Libya in the context of expected demand growth this summer. The U.S. Energy Information Administration's (EIA) Short-Term Energy Outlook (STEO), released July 12, reported the unrest in Libya had removed about 1.5 million barrels per day of light, sweet crude oil from the market since late February, totaling over 190 million barrels by the end of June. World liquid fuels consumption in the STEO grows by 1.7 million barrels per day from the second quarter 2011 to the third quarter 2011, while production by countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC) falls by 0.2 million barrels per day. EIA expects Saudi Arabia will increase production over the next few months, but a significant part of that increase could be absorbed by growth in Saudi oil use to meet summer demand for electricity.