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IEA Sale of Oil, Gasoline May Set Oil Price Ceiling (Update3)
Sept. 15 (Bloomberg) -- From its headquarters on the banks of the Seine River in Paris, the International Energy Agency has analyzed world energy prices for three decades. Today it had a chance to change them.
Representatives of the 26 IEA member countries met today in Paris, where they agreed to keep releasing as much as 2 million barrels of oil and fuel a day from their reserves to make up for supply disruptions in the U.S. caused by Hurricane Katrina. Crude oil prices in New York extended losses after the decision and are down more than 7 percent since the program was announced Sept. 2.
The release ``sends a signal to the market,'' Gary Ross, chief executive of PIRA Energy Group, a New York-based consultant to more than 400 oil and gas companies, said before the meeting. ``It should give pause to everyone who was investing just to be long. It caps the upside.''
Crude oil prices have dropped more than 9 percent since reaching a record $70.85 on Aug. 30, after the hurricane shut oil platforms and refineries along the Gulf Coast. As consumers pay record or near-record prices at the pump, gasoline futures for October delivery are at pre-storm levels, signaling traders expect supplies will soon recover.
The IEA today said its next evaluation of its releases, scheduled to last for one month, will be in late September or early October. The Organization of Petroleum Exporting Countries, the source of more than a third of the world's oil, meets next week in Vienna.
Lines at gasoline stations in 1973 and 1974 prompted then- U.S. Secretary of State Henry Kissinger to form the IEA as a counterbalance to OPEC. The group, whose members include the U.S., Japan and 17 of the 25 European Union countries, has released reserves only once before, during the 1991 Persian Gulf War.
Pump Prices Rise
Average gasoline prices at the pump in the U.S. reached a record $3.057 a gallon on Sept. 2, the day the IEA and U.S. Energy Secretary Samuel Bodman announced the release of oil and refined products from emergency stockpiles, according to AAA, the nation's largest motoring organization. Prices peaked at $1.417 in March 1981, the equivalent of $3.14 today when adjusted for inflation. Yesterday, U.S. prices fell to $2.915.
In Europe, pump prices range from $4.08 a gallon in Latvia to $6.91 a gallon in the Netherlands, according to data collected by Farnborough, England-based AA Motoring Trust Ltd.,
IEA member governments have emergency stockpiles of about 1.4 billion barrels, a majority in crude oil but also in gasoline, diesel fuel, fuel oil and similar products. At the planned release of 2 million barrels a day, about equal to daily output from the U.K., the reserves could last for almost two years.
The IEA and its staff of 150, based in the shadow of Paris's Eiffel Tower, had become known more for their monthly oil reports, energy outlook textbooks and statistics than for the capacity to move markets by releasing reserves.
`Better Late Than Never'
``At last the IEA is doing something useful apart from the collection of statistics,'' said Leo Drollas, deputy executive director for the Centre for Global Energy Studies, a London-based consultant founded by former Saudi Arabian Oil Minister Sheikh Ahmad Zaki Yamani. ``Better late than never.''
Oil and gasoline prices in New York had their biggest decline in two weeks on Sept. 2, after the IEA said it would release reserves. Crude oil for October delivery fell as much as $1.19, or 1.8 percent, to $63.90 today on the New York Mercantile Exchange. Prices are 63 percent higher than a year ago.
``In effect, the member nations of the IEA have decided to attempt to regulate the upper bound on prices,'' said Paul Horsnell, head of energy research at Barclays Capital in London. ``They did that by using what mechanisms they had, however blunt and imperfect they might be.''
IEA members are required to hold stocks equal to 90 days of their oil import needs. The group's European members collectively hold 161 million barrels of crude oil and 207 million barrels of oil products as of June 2005, according to IEA statistics.
New Role
The IEA may be carving out a role similar to the one played by Saudi Arabia, the world's largest oil exporter.
``Perhaps we'll see the IEA become a principal actor with a role like Saudi Arabia as the central banker of oil,'' said Jacques Tissier, who manages about 170 million euros ($209 million) in energy and shipping stocks at Stratege Finance in Paris. ``There's no one else that can do it now.''
Claude Mandil, the IEA's executive director, said reducing prices was a ``welcome'' byproduct of the organization's original mission: to maintain and improve systems for coping with oil supply disruptions.
``The prices are a signal, but not the basis'' for an emergency release, Mandil said in an interview. ``We launched the emergency plan to relieve shortages, an annex measure is prices. They should go down, that's very much welcomed because they were too high, but we have not decided this emergency plan for price reasons.''
U.S. Politics
U.S. President George W. Bush's job-approval ratings have fallen to the lowest of his presidency in polls taken since Hurricane Katrina struck the Gulf Coast. In a survey by Time magazine, 69 percent of the 1,000 people polled said Bush hasn't done much to keep gasoline prices down, and 74 percent said the president has some control over these prices.
The U.S. is releasing oil from its Strategic Petroleum Reserve, 700 million barrels of oil stored in salt caverns along the costs of Texas and Louisiana.
``Politics is always in the background when you consider to withdraw from the Strategic Petroleum Reserve,'' said Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington. ``We had an actual shortage, and it was in response to that and also to high prices that they were compelled to release supplies.''
The IEA conducts drills and mock supply-interruption scenarios every two years. A test in October simulated a disruption in Europe to see how the group could best react.
Planning for Disruptions
Those scenarios had little in common with the destruction caused by Hurricane Katrina. Eight refineries in Louisiana and Mississippi were closed after the storm, knocking out at least 1.79 million barrels a day of refining capacity, or about a 10th of the nation's total. The U.S. Gulf produces about a third of the nation's crude oil and a fifth of its natural gas.
``It's hard to say we had been thinking about this sort of problem,'' William Ramsay, deputy director of the IEA, said in an interview. ``The traditional supply disruption you think about is a political one, like the 1973-1974 embargo. Here, you had a situation where a local refining problem could become a global one.''
The IEA's only previous release of reserves began on Jan. 16, 1991, the day air strikes began in the first U.S.-led war on Iraq. The release and early success of the war effort prompted crude oil prices on the New York Mercantile Exchange to drop by a third, or $10.66 in a day, to $20.66 a barrel, the contract's biggest single- day decline.
Previous Failure
The release was unneeded and a ``a failure by most standards,'' the Oxford Institute for Energy Studies said at the time.
Goldman Sachs Group Inc. equities analyst Arjun Murti roiled markets in March with a report that oil may reach $105 a barrel because of a supply interruption. Jeffrey Currie, head of commodities research at Goldman Sachs in London, this week said he prefers refined products to crude oil as an investment.
The IEA's decision to release reserves, coupled with U.S. loans of crude oil to refiners, ``are going to be sufficient to balance the crude market but not the product markets,'' Currie said in a Sept. 12 interview. Because the releases ``don't adequately deal with the product shortages, some demand will have to be curtailed through higher product prices.''
The IEA said its members were unanimous in their decision to tap emergency reserves this time after the agency determined there was a ``severe disruption.''
Consulting OPEC
Before acting it also coordinated with the group it was initially set up to counterbalance: OPEC. Mandil said he spoke with OPEC's secretariat and representatives from Kuwait and Saudi Arabia, OPEC's largest member, before the agency made a decision.
``It's a strong signal to the market that the U.S. and European governments are prepared to intervene if prices rise too high,'' said Tor Kartevold, an oil analyst at Stavanger-based Statoil ASA, the biggest oil company in Norway, which ranks third among crude exporters. ``Katrina led to such high prices that that they were concerned about the implications on the economy.''
Mandil, sitting at one of 60 chairs around an oval table on the second floor of the IEA's headquarters, said the group's coordinated response to the hurricane should make Kissinger proud of his creation.
``I'm sure Kissinger would be happy to see his brain child works when needed,'' Mandil said after today's meeting. ``It shows the IEA can respond to any crisis, not just the OPEC embargoes he envisioned.''
Spaf
