Analysis: OPEC, IEA clash over oil reserves weapon

LONDON (Reuters) - Consumer watchdog the International Energy Agency's emergency oil release is a desperate measure that threatens to undo two decades of cooperation with OPEC and could fail to calm prices.

Thursday's announcement of a 60 million-barrel release from emergency stocks -- only the third in the IEA's 37-year history -- came after consumer nations unsuccessfully applied pressure on the Organization of the Petroleum Exporting Countries to increase its output at a meeting this month.

The talks collapsed in disarray, but top exporter Saudi Arabia said it would still produce as much oil as the market needed.

As far as OPEC delegates were concerned, there was no justification for any action from the IEA.

OPEC delegates from the Gulf, which has traditionally sided with the U.S. and favored moderate prices, as well as from anti-U.S. Iran said it was unnecessary, unjustified interference.

"The oil price hasn't shot up to $150. There is no reason to do this. The market is not short of supply. Kuwait and Saudi Arabia have been raising production, but there have not been many buyers. The IEA is just playing politics with the U.S.," one Gulf delegate told Reuters.

Analysts said it was too early to say whether OPEC would retaliate directly by reducing supply, but dipping into finite emergency stocks ahead of the expected increase in demand later this year could be a miscalculation.

OPEC has yet to issue an official statement, but speaking at Reuters Global Climate and Energy Summit last week, OPEC Secretary General Abdullah al-Badri accused the IEA of being unprofessional.

"Strategic reserves should be kept for their purpose and not used as a weapon against OPEC," Badri told Reuters.

FAIR WEATHER FRIENDS

Badri's words recall OPEC's use of its "oil weapon" during the Arab Oil Embargo, which led to the creation of the IEA in 1974 to protect consumers' interests.

A more harmonious chapter began with the formal beginning of producer-consumer dialogue through the International Energy Forum in 1991.

Since then, OPEC-IEA dialogue has been happiest when oil prices were high enough to reward oil producers, but not so high as to alarm consumers, although U.S. pressure also got in the way of an OPEC agreement in 2000.

Taking exception to U.S. interference at a meeting in March of that year, Iran refused to sign up to a deal to increase supply, although it subsequently did so.

In 2000 as now, a Democratic president (at the time Bill Clinton) was seeking re-election and facing uncomfortably high gasoline prices, then around $1.50 a gallon, compared with around $4 a gallon now.

U.S. crude was trading around $26 a barrel compared with well above $100 now for Brent crude, which has taken over as the leading benchmark.

In June this year, OPEC failed to get as far as a new production agreement. Iran, holder of the rotating OPEC presidency, was joined by six other nations in refusing to add more oil to the market.

They refused even though data from the OPEC headquarters in Vienna agreed there could be an oil shortage later in the year.

Saudi Arabia, which holds almost all available spare production capacity, is expected nevertheless to raise its output toward 10 million barrels per day (bpd) in June and July.

It says its spare capacity that it keeps for times of market tightness can be brought onstream very quickly.

IEA ARGUES THERE IS SUPPLY DISRUPTION

The IEA voiced doubt the extra Saudi crude would arrive in time and said it might not be of sufficient quality to compensate for light sweet crude lost to civil war in OPEC nation Libya.

That was justification for releasing 2 million bpd over 30 days, although some analysts said it constituted a shift in the rationale of strategic stocks that are kept for emergency supply disruption.

One analyst said the IEA was taking on Saudi Arabia's role as the supplier of last resort, which has long underpinned its influence in the world and its links with the world's biggest oil consumer the United States.

"I think the IEA is trying to act like a central bank," said Dominick Chirichella at New York's Energy Management Institute.

Although the IEA said it was only filling a supply gap, other analysts also said concern about the frailty of the world economy had to be a factor.

"It's an economic measure, but there is a supply gap," said Lawrence Eagles of JP Morgan.

In a note issued after the June 8 OPEC meeting, JP Morgan warned releasing emergency reserves could make markets more anxious rather than less.

"A release now would send the message that consumer governments have little faith that there is any spare capacity within the producer group, and/or there are concerns over OPEC's short and long term price aspirations," it wrote.

Saudi Arabia previously said oil at between $70 and $80 was the right range for producers seeking to invest in new supplies and consumers, but in June Saudi Arabian Oil Minister Ali al-Naimi said that range was a thing of the past.

He did not specify his new preferred price, but many analysts have said Saudi and other members of OPEC might be keen to establish $100 as the market's floor.

"OPEC will wait and see, but I doubt it will take oil out of the market as long as Brent is north of $105," one Saudi analyst said. "Just a guess," he added.

At the same time, Saudi Arabia's desire to please its long-term ally the United States has been eroded by what Riyadh regarded as the U.S. decision to abandon Hosni Mubarak of Egypt, a crucial ally for both Saudi Arabia and the United States until his overthrow earlier this year.

U.S. President Barack Obama's often-stated desire to reduce U.S. dependency on foreign oil has played badly to Saudi Arabia's domestic audience as the kingdom spends billions on maintaining spare oil capacity.

Ties with the world's second biggest oil consumer China, already the biggest energy consumer -- although yet to become a member of the IEA -- are warmer and it is has already become state oil firm Saudi Aramco's biggest client.