The Dark Side of the OECD Oil Inventory Release

IEA in Paris announced this morning a release of 60 million barrels from OECD inventories. The implications of this extraordinary action are not positive. Let’s first take a look at the most recent global production data, which shows the large downward move of supply coming into March 2011, from the loss of Libyan oil. IEA is pointing to this loss of supply as the prima causa for its decision. | see: Global Crude Oil Production in mbpd (million barrels per day) 2004-2011.

While some asset markets, perhaps global stock markets, may take comfort from the lower price of oil over the next 90 days, the intermediate term realities, implied by this action, are rather worrisome. I will list a few here:

* We know that Saudi Arabia did not rescue the oil market this Spring, as was originally anticipated. Both the Financial Times and covered this issue originally in February. By April, it was clear that Saudi did not make up the Libyan loss. Thus, the IEA inventory release implies that whatever extra supply Saudi Arabia can offer, it is either too sour and heavy to bring down the price of global diesel, or Saudi can only pump extra oil for short periods of time. In my view, both of these factors are in play.

* Releases of oil from inventory are counterintuitively bullish, not bearish, for prices. While oil prices no doubt will be rocked for several months now, releases such as these only highlight the fundamental problem at hand: structurally restrained supply. For example, the OECD could have turned to non-OPEC producers within their sphere of influence and asked them to produce more. But Non-OPEC producers, accounting for 57% of total global supply, have no spare capacity. The oil market is going to figure this out more quickly than most imagine.

* By knocking price down, the IEA is threatening the vast quantity of marginal supply that has come on stream the past two years. Much of this oil is broken free from shale, drilled at great depths in oceans, or converted from oily dirt (tar sands). To the extent that price is knocked down by such actions, this will affect the future development plans of those Oil and Gas producers who’ve been engaged in bringing the world its new, high-priced supply. I target the $80.00 level as the price point not where supply is taken offline, but where future marginal supply of any substantial note is at risk. Again, the oil market is going to do this math and it will not take long to run the calculations.

Today’s release of inventory is confirmation that the era of permanently constrained supply is now very much with us. Because industrial economies are simply machines that convert energy inputs into useful work and services, today’s action is also a reminder that the dream of higher growth in conjunction with lower oil prices is now a backward looking view, a nostaglia for a past that’s no longer possible.


IEA Press Release: IEA makes 60 million barrels of oil available to market to offset Libyan disruption.

  • If the goal is lower prices, at least they picked a good time to announce the stockpile release. Charts rolling over, Greece, etc…If this had been in March crude would probably be up $5 bucks.

    Longer term agree this is a joke.

  • On a day like this, your posts are a MUST read!  Thank you for helping to give the rest of us insight into this incredibly interesting topic.

  • Great post. Thanks for sharing.

  • Anonymous

    Good article but, there is a large amount of oil out there – until very recently world wide stocks were approaching record levels. The problem is that the funds were, again until very recently, very, very long futures. The oil companies and banks were short the futures but hedged by physical bbls. The result was that over half of the oil in storage worldwide (excluding SPR) was in effect held as a hedge against the futures held by the speculators, i.e. not available for sale or consumption.
    The speculators have been losing length recently and may continue to do so in the near future, freeing up physical oil, but sooner or later they will start to load up again on futures – buying the dip.
    Until today that was not the easiest thing to do in that there was not that much available physical oil for the “short sellers” of the futures to use as a hedge. This release of the SPR makes more physical barrels available which may result in the paradox whereby increased supply allows the oil companies and banks to short sell more futures to the funds which will inevitably drive the price up …..
    paradox: increased supply leads to higher prices

  • the atlantic’s take …

    soundbite .. “Those 60 millions barrels — which sound like a lot! — are about 17 hours worth of global oil consumption, or three days and change of just American oil consumption. “

  • Joe Humphreys

    If the idiot in the white House was REALLY concerned about the price of gas why doesn’t he approve the Keystone Pipeline Project that would accomplish the same thing on a sustained basis, generate millions of tax revenues to the Federal government, create THOUSANDS of high wage high value union jobs and  reduce our reliance on unstable suppliers like Venezuela and the Middle East??? Because this is ALL about politics not jobs and security!!! 

  • Its all about this:


    I share your frustration over the lack of coherent energy policy. Though, from my perspective, the US has never really had much of an energy policy at all. I was surprised that Obama continued in this vein, as his administration has continued the overweight investment in the Automobile-Highway complex.

    The US produces a little more than 25% of the crude oil its consumes. Building new pipelines, or drilling in new areas, would certainly increase supply. They would not change the global price of oil. But, as I have advocated on this blog and in media appearances, I would personally support new offshore drilling in the US but for the sake of building or rather rebuilding our rail network.

    The position here at is that the US highway system and car-dependent economy has entered diminishing economic returns, as it was built out on 12-14 dollar oil many decades ago. Thus, I am often in the tricky position of advocating for increased, domestic oil supply–but–at the same time pointing out that the goal of oil independence is unattainable. After all, US oil production peaked 40 years ago.

    That said, the Obama approach to energy is dumb. Just not dumb in a way that someone on either the political left or right would interpret–typically speaking. But yes, this is mostly political. Though, there is more going on here than just politics.

    Since the US Auto-Highway complex is, and has always been, a government supported program then I see no problem in a rail revival also supported by govt spending.



    Yes, it appears the OECD leadership is waking up an having a panic about the geological realities of this unique substance called oil.


    Thankyou. I am still working on the second part of the BP Consumption/Production post, in which I am trying to better unravel the mystery of how 2010 consumption exceeded production by a large amount. I mention this because it appears that non-OECD inventories and also world floating storage was called upon last year.

    FYI, I am working on a post that quantifies the actual government controlled stocks from which today’s action is supposed to draw.



    Historically, as you are probably aware, SPR releases have been very, very effective in breaking crude price strength. This time around, I’m not so sure. But you are spot on that they have picked a vulnerable time–at least seasonally–to conduct this operation. I assume you noticed that WTIC remains above the breakout point first tripped by the Libyan disruption, last February.


  • Anonymous

    South Korea is one of the countries joining the US in releasing reserves.
    They have their own strong reasons for doing so.

    Clearly supplies are tight everywhere.


    South Korea and Sweden are post war miracles in the sense that they possessed no domestic oil supplies, but, were able to fashion powerful or creative economies that invented products for sale to the world. One hitch: the world they sold products to was operating in a cheap oil era.

    So what happens now, that the world these two countries sold into no longer has the same quantity of extra capital–for consumption?

    We await the answer.



    Good to see you. Cheers. -G


    For those who have put together the ideal life, such as yourself, these realities matter just a little bit less. 🙂


  • “By knocking price down, the IEA is threatening the vast quantity of
    marginal supply that has come on stream the past two years. Much of this
    oil is broken free from shale, drilled at great depths in oceans, or
    converted from oily dirt (tar sands). To the extent that price is
    knocked down by such actions, this will affect the future development
    plans of those Oil and Gas producers who’ve been engaged in bringing the
    world its new, high-priced supply.  ”

    That kind of supply is highly polluting and has a very low EROEI – it will not save the world economy, but actually make things worse in the long run.
    I actually welcome the IEA oil release.
    It will be a buying opportunity for oil options.
    It will extend the current economic paradigm a bit longer, at the expense of having a more severe crisis down the road. I welcome this, as it gives me more time to prepare and the crisis is needed to bring out the much needed paradigm shift.