A surprise attack from an unlikely source sent oil prices reeling this past week.
The International Energy Agency, the Paris based research arm of 28 industrialised countries, held an emergency press conference to announce that its members would release 60 million barrels onto the market — allocating two million barrels a day for a month. Half of the total will be coming from the US Strategic Petroleum Reserve.
It is only the third time the IEA tapped reserves; the first was in 1991 during the Gulf War, then again in 2005 when Hurricane Katrina wiped out some production in the Gulf of Mexico.
This move triggered memories of G-7 currency interventions in the mid-1980s, the fabled Plaza and Louvre accords, when collective action by central banks was taken to either raise or lower the US dollar.
Some market purists were crying foul since governments decided to play an active role to sway prices. But the energy market, with members of the OPEC cartel controlling about 40 percent of production, certainly is not what one would call a free market.
The IEA’s emergency move can be linked back to the OPEC meeting in Vienna earlier this month. The 12 members left without agreeing to raise their production quota of 24.84 million barrels a day. In sum, the price hawks — led by Iran and Venezuela — did not agree with OPEC’s swing producer Saudi Arabia, along with the UAE and Kuwait, on the need to raise production.
On the eve of that OPEC gathering, the IEA said that oil above $100 a barrel would undermine growth in the second half of this year. Last week, at the St. Petersburg International Economic Forum, I asked the IEA’s Executive Director Nobuo Tanaka whether that strategy of leaning on OPEC backfired. He said the organization was willing to do its part if others could not raise production; now we know what he was referring to.
While this joint strike attack brought prices down about four dollars a barrel, it will be up to those who hold the spare capacity to continue a downward trend in prices. The IEA says OPEC members have just over four million barrels of extra production they could bring to market — three-fourths of that in Saudi Arabia with the balance shared by the UAE and Kuwait.
Saudi Arabia, through a leak to the Middle East newspaper Al Hayat last week, said it would add another million barrels of production in July — ignoring OPEC’s call to leave production where it is.
This is a clever and no doubt coordinated one-two punch from the IEA and US ally Saudi Arabia — but it may not be a knock punch against those wanting to keep oil above the century mark.
John Defterios is CNN’s anchor for Marketplace Middle East. For more information go to www.cnn.com/mme.
