The International Energy Agency agreed to release 60m barrels of oil in the coming month to offset the daily production loss of 1.5m barrels of high quality oil from Libya, the north African country engulfed in a civil war.
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The US led the release with its special petroleum reserve providing 50 per cent of the crude oil. Japan, Germany, France, Spain and Italy are providing most of the rest. The IEA said that it was in consultation with China, the world’s second-largest oil consumer, but declined to say whether Beijing would join the effort.
Brent crude prices tumbled 7.4 per cent to $105.72 a barrel after the news was released, before settling at $107.26 in late London trading. Investors sought the safety of US government debt, pushing yields on four-week Treasury bills into negative territory and yields on three-month bills to just above zero. The yield on 10-year Treasury notes fell 8 basis points to 2.91 per cent, the lowest close since December.
This is only the third time in the history of the IEA – set up in 1974 as a counterbalance to Opec after the Arab oil crisis – that there has been a release. The move has been triggered by western concerns about the impact of high crude prices on the economic recovery.
The Libyan supply disruption, coupled with “the normal seasonal increase in refiner demand expected for this summer will exacerbate the shortfall further”, warned the IEA.
“Greater tightness in the oil market threatens to undermine the fragile global economic recovery,” the IEA warned, citing the Libyan supply disruption and “the normal [summer] seasonal increase in refiner demand”.
The US had been in close contact with oil producing and consuming countries about disruptions to the international oil market that could affect the global economy, said Steven Chu, US energy secretary.
“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” Mr Chu said.
“As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.” The US special petroleum reserve is currently at a record high level of 727m barrels.
David Goldwyn, a consultant and until recently the US State Department’s top diplomat for oil affairs, said weak economic growth demonstrated that the oil disruption was inflicting “severe and long lasting damage” – a precondition for Washington to authorise the release of the oil reserve.
Robert McNally, a consultant and White House oil adviser from 2001 to 2003, said that although the IEA was pointing to Libya, “in reality the forcing action is the surge in oil prices”.
This month, Opec members failed to agree an official increase in production quotas despite a concerted effort by Saudi Arabia, the world’s biggest producer and traditionally seen as the cartel’s de facto leader, to boost output. Iran opposed the increase.
The IEA said in May that it would use all tools at its disposal to increase supply unless the cartel raised production. Opec failed to reach an agreement to increase official production targets in Vienna this month despite strong efforts by Saudi Arabia and other moderate Gulf countries such as Kuwait.
Mohammad Ali Khatabi, Iran’s Opec governor argued on Wednesday that there was no evidence of a supply shortage necessitating the “interference of oil consumers”.
“Maybe they think there is more demand, but as far as we know the market enjoys stability in supply and demand,” he told the Financial Times.
Iran opposed increase in the oil production in the Opec meeting earlier this month and was pleased that the oil cartel rejected a change of quota against the will of Saudi Arabia, the biggest producer.
But analysts said the current situation did not constitute an emergency.
“The reality is that we are well supplied,” said Randa Fahmy Hudome, an energy consultant and former Bush administration energy official. “The price of oil has risen and dropped so there is not a supply problem in the market. It’s just that the economy is not doing as well as people would like.”
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