Oil stock releases unlikely to dampen prices for long
Monday, 02 April 2012 | 11:00
Oil stock releases by Organization for Economic Cooperation and Development countries would lower prices in the short term, but would be unlikely to have a lasting impact, traders said.
There have been recent media reports that the US, UK, France and Japan are considering a strategic oil stock release over the next three months to cool down crude prices which have been trading at near three-year highs since February.
But while a stock release would immediately cut the Brent crude futures price and feed through to the physical crude and products markets, it would be unlikely to last more than a few weeks, traders said.
This is because stocks will need to be refilled at some point, creating upward pressure on prices and because the volumes involved are likely to be small compared with total demand for oil over several months, they added.
"It's a very poor instrument to control the price," said one London-based trader. "Stocks always need to be refilled and it's not using the reserves for what they are meant to be...what if there's a real supply shock and the Straits of Hormuz close? There would be nothing left," he added.
The International Energy Agency, the OECD's energy watchdog, has only released stocks three times in its history: In 1991, during the first Gulf war; in 2005, after hurricane Katrina in the US; and in 2011, following the loss of Libyan production.
But traders said releasing stocks again this year would mark a new-found activism by governments in oil markets at a time when there is no obvious supply shock and physical prices are at a seasonal low.
The Urals crude market was trading at its lowest level in 11 months Thursday, while North Sea crude prices were said to be little affected by a major outage at the Elgin-Franklin fields on the UK Continental Shelf.
Physical premiums were low because of a lack of crude demand in the refinery maintenance season, said traders. Refineries usually undergo maintenance in the northern hemisphere spring because that is traditionally when product demand dips.
Forties crude, the stream that sets the Dated Brent assessment, was assessed at a premium to the benchmark of $0.105/b Wednesday, well below 2011's average of Dated Brent plus $0.39/b.
"Releasing stocks in the period with the lowest demand doesn't make sense...doing it over the summer would be more logical," said one trader.
"The physical market is amply supplied right now but I think supply will tighten again from April-May and the third quarter onwards," he added.
"Looking at the way Europe has managed the Greek crisis we should now expect a sound-bite about stock releases every day," analysts at Petromatrix wrote in a note.
"The odd reality however is that France is currently refilling its strategic stocks of distillates and is expected to buy more during the summer."
Traders pointed to the IEA's June 2011 release of crude and products, which lowered the Brent price and forced the price structure from backwardation to contango, but for only a few days.
Three months later, physical markets were very tight as Forties crude reached a historical high of Dated Brent plus $2.15/b and several Mediterranean grades rose steeply, they added.
"The last stock release had an effect for only a few days...I wonder if there's much governments can do in the medium term," said a trader.
However, traders noted growing volatility on Brent futures intermonth spreads as bullish and bearish factors were affecting the price in different ways.
In the physical markets, there was the potential for further supply disruptions in the North Sea and the reopening of an arbitrage to Asia, despite the current oversupply, they added.
"The volatility is crazy...there are so many things affecting the price in all sorts of directions," said one trader.
"There are headlines about strategic stock releases but then you've got Iran with the potential to be very bullish," he added.
"I keep a close eye on the size of my positions and may not carry them over the weekend," said another trader.
"Even if you're right in such a market you could be hit with stop-losses and lose money."