By Adam Currie — Exclusive to Oil Investing News
With crude prices surging, some of the world’s leading powers are becoming more innovative in their attempts to rein in prices. With debate rife on whether to release strategic reserves, many are questioning the legality of such a move, as well as whether it is being made for political gains.
In an unprecedented move, Saudi Arabian Oil Minister Ali Naimi recently mounted his most direct attack against increasing oil prices, but still has shown no sign of moving to increase supplies, despite talks by the US, France, and Britain relating to the release of strategic reserves.
Two weeks after rumors emerged that the US was set to agree on tapping emergency stockpiles, French Energy Minister Eric Besson confirmed that the European nation was in talks with authorities about a similar move. The market has shown minimal response to the rumors, with some analysts warning that at best the move would have only a “limited and temporary” effect.
Threat to economies
In theory, a nation’s emergency reserves are held in the event of a natural disaster or a major crisis such as a war. However, with prices continuing to climb on the back of supply concerns, there is increasing concern that fuel costs have the potential to damage a still fragile global economic recovery.
Analysts have continued to question the move, stating that it would have little effect on prices in the long term.
Speaking to a media source last week, Luca Baccarini of Energy Funds Advisors said a “tactical use of the reserves would certainly have an impact on the market but it would be temporary because the underlying problem is an increase in demand, while supply is limited by constraints on production.”
Saudi minister speaks out
At the same time, the Financial Times published an opinion piece by Saudi Oil Minister Ali Naimi, head of the world’s largest crude oil exporter, who stated that the feared shortage of supplies is a “myth,” before reiterating that Saudi Arabia is able and willing to meet any gap in supplies.
He wrote, “[i]t is clear that sustained high prices are starting to take their toll on European economic growth targets. They are contributing to trade balance deficits and feeding inflationary pressures. It is an unsatisfactory situation and one Saudi Arabia is keen to help address.”
In attempting to maintain partiality, Naimi attempted to calm any potential market panic by underlining that Organization of the Petroleum Exporting Countries (OPEC) members, including Libya, Iraq, and Angola, have taken positive strides to increase crude output.
“So the story is one of plenty. Supply is not the problem, and it has not been a problem in the recent past. There is no rational reason why oil prices are continuing to remain at these high levels,” he wrote.
Despite the Saudi kingdom’s claims that it is able to increase production to allow others to maintain reserves, no increase has occurred.
In a recent market comment, Olivier Jakob at Petromatrix said that the market giant has so far maintained its current level of production.
“The world needs proof of barrels, not words, and Saudi Arabia for now is delivering the latter rather than the former,” he said.
The situation is one that goes beyond the countries investigating the potential release of strategic reserves; the International Energy Agency (IEA) confirmed last week that it is closely monitoring market developments.
In a statement, IEA Executive Director Maria van der Hoeven noted that prices at the pump have hit record highs in some countries and that the IEA “is concerned by the impact of these high prices while the global economic recovery remains fragile.”
Some political analysts have labelled the reserves debate as politically motivated. Record-level fuel prices in both the US and France have prompted debate between presidential candidates ahead of national elections.
While French Prime Minister Francois Fillon has said that there is a “good chance” that the IEA will allow reserves to be drawn on, Washington has made it clear that no decisions have yet been made.
While many feel that a move by Saudi Arabia to increase production could have a more long-lasting effect than that of the release of reserves, legal hurdles will need to be overcome.
The legal trigger for a stock release, however, remains ambiguous. The IEA’s information suggests that the trigger is an “actual or potentially severe oil supply disruption” or a “major world oil supply disruption.”
The original International Energy Program (IEP) agreement defines a disruption as amounting to 7 percent or more of a participating country’s daily supplies. That said, this requirement has been waived in the three stock releases the IEA has approved so far, including the Gulf War, Hurricane Katrina, and the Libyan civil war.
Regardless of the result of this debate, one thing it has highlighted is that there is growing concern from both consumers and producers in terms of the economic and potential political impact of rising crude prices.
Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.