IEEJ: July 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (49)June 30, 2011

IEA Oil Reserves Release and International Oil Market
Ken Koyama, PhD
Managing Director, Chief Economist
The Institute of Energy Economics, Japan

The international oil market has seen various turbulent developments emerging one after
another in the first half of 2011. In an effective last development for the period, the International
Energy Agency made a decision on June 23 to release 60 million barrels in oil reserves over 30 days,
surprising oil market participants.
In a press release, the IEA specified the reserves release as designed to make up for oil
supply losses on the Libyan crisis. The IEA estimates that the unrest in Libya had removed 132
million barrels of light, sweet (low-sulfur) crude oil from the market by the end of May. As is wellknown, Saudi Arabia has increased oil output to cover part of the supply losses. Overall, however,
low-sulfur crude oil supply has clearly been far less than in a case without the Libyan crisis. Given
the current Libyan situation, no one can expect substantial recovery in Libyan oil production, withthe “supply disruptions” being likely to continue. This point might have been a major factor behind
the IEA decision to release oil reserves.
The IEA member countries have thus agreed to take such actions as the reserves release to
make 2 million barrels per day, or a total of 60 million barrels, available over 30 days in the market.
These countries will take their respective actions, including the United States’ release of strategic oilreserves (30 million barrels) and Japan’s reduction in the oil stockpile obligation (number of daycover) for the private oil companies.
In fact, the recent IEA decision represents the third IEA-coordinated oil reserves release,following those that responded to the 1991 Persian Gulf crisis and the 2005 Hurricane Katrina
disaster in the U.S. What the three cases saw in common were conspicuous oil supply disruptions
accompanying geopolitical risks or disasters. But the time span between the emergence of supply
disruptions and the decision to release oil reserves and the crude oil market price trend in the latest
case differs from the time spans in the two earlier cases. In this sense, the latest decision may beinterpreted as unique. Specifically, the decision to release oil reserves came four months after supply
disruptions emerged amid the Libyan crisis. Regarding the oil market price trend, the decisioninterestingly came amid a downward trend for crude oil prices. The benchmark West Texas
Intermediate crude oil futures price has followed a downward trend while seesawing, since it topped$110 per barrel in early May. It slipped below $100 on June 10 before falling further below $95. The
downward trend has been clear amid uncertainties about the future course of the world economy.
Even amid the downward trend, the crude oil price levels above $90 cannot be described as“cheap.” Although we now see the downward trend amid economic uncertainties, oil supply/demand,
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IEEJ: July 2011

geopolitical and financial uncertainties indicate that crude oil prices could turn up again toward thesecond half of the year. For the world economy, particularly for industrial countries plagued withmany anxieties regarding economic recovery, the present and future crude oil price trends are a risk
factor to which responses are important. The latest IEA decision to release oil reserves came amidsuch market environment. In this sense, I suspect that oil market participants might have taken theIEA decision as designed not only to respond to the physical supply disruptions but also to stabilize
oil market prices.
In this respect, the U.S. situation might have been the biggest focus of attention behind theIEA decision. In the United States, crude oil price hikes trigger gasoline price rises and can easily
become a social or political problem. Ahead of next year’s presidential election, a full-blown
economic recovery or the prevention of economic deterioration is a very important politicalchallenge. In this sense, the U.S. administration has been required to appropriately address all
economic risk factors as much as possible. Before the Federal Reserve ended its Quantitative Easing
2 policy in June, the administration was looking for the next action to take. Under such situation,
crude oil price hikes were a great matter of concern to the United States. When crude oil price hikes
grew remarkable in April and May, arguments grew for a unilateral U.S. action to release strategic
oil reserves and for market regulations to address speculative and financial factors behind the pricehikes. Market observers seemed to speculate that the administration enhanced pressures on major oil
producing countries to increase oil supply in the international market. Under such circumstances, theOrganization of Petroleum Exporting Countries at its latest meeting discussed a production quota
increase. While OPEC shelved any official agreement on the production quota increase, such OPEC
members as Saudi Arabia decided to effectively expand oil output. The development is still fresh in
our minds.
The IEA decision to release oil reserves thus came amid expectations for crude oil pricefalls. In response to the decision, in fact, the WTI futures price temporarily slipped below $90/barrel
before closing $4.39 lower at $91.02 on June 23. The market development may indicate that the IEA
decision, in addition to economic uncertainties, worked to push down the price. As far as thedecision is an additional factor to push down crude oil price, however, how long the IEA decision
would remain influential is uncertain depending on future economic conditions as the main factor.
The IEA decision to release oil reserves has thus exerted some influences on theinternational oil market and crude oil prices and has become a key factor to which attention must be
paid in anticipating future market developments. If the two preceding IEA decisions to release oil
reserves represented a traditional approach of responding promptly to large-scale oil supply
disruptions, some may interpret the latest decision as an effort including some new factors. This
point also attracts attention.
Regarding the attention-attracting IEA decision to release oil reserves, I am paying attention
to the following three points for the future. The first point is how long the oil reserves release willremain influential for overall supply and demand in the international oil market. The second point isthe IEA’s relations with oil producing countries. OPEC has indicated strong opposition to the IEA
decision, noting that oil supply has been sufficient in the market and that any intervention in themarket or prices is undesirable. It may be desirable for IEA oil consuming countries and OPEC oil2

IEEJ: July 2011

producing nations to cooperate in achieving their common goal of market stability. In response to thelatest decision, their future relations, particularly the IEA members’ relations with Saudi Arabia, may
attract much attention. The third point is how the market will interpret the IEA decision. Attention
may be paid to whether market participants including financial players will view the presence of theIEA and the oil reserves release as a new factor for considering the market.

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