COLUMN-IEA oil release faces bigger logistics hurdle with Iran-Campbell

Wed Feb 29, 2012 10:04am EST

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(Robert Campbell is a Reuters market analyst. The views expressed are his own)

By Robert Campbell

NEW YORK Feb 29 (Reuters) - Western policymakers are itching to release strategic oil stocks after their Iran policies triggered a potentially damaging surge in crude prices, but the logistics issues that dampened the impact of last year's emergency oil sales are more daunting now.

The temptation to release stocks is great. Leaving aside election year concerns, Western governments have a legitimate concern that rising energy costs may derail the still-fragile economic recovery.

Issues of diplomatic prestige make it very difficult for Western governments to reverse their latest sanctions imposed on Iran over its nuclear program, meaning some sort of palliative for the oil price impact is needed.

But an emergency release of stocks by the member countries of the International Energy Agency may not be a panacea.

Like last year, the strategic stocks are in the wrong place to meet prompt demand. Last year the needed crude oil supplies were in the United States while the demand was in Europe.

This year the United States is again the principal supply center but the main point of demand is further away in Asia, where demand for crude oil from outside the region has been a major factor behind the recent strength in oil prices.

In other words, in the event of a strategic release, America will by trying to push crude out of the Atlantic into Asia, something that will take a very long time to bear fruit.

The Libyan crisis showed how difficult it is to indirectly affect oil trade flows with emergency oil stocks.

It took weeks for the United States' release to drive West African sweet crude to Europe given the long-lead times in purchasing oil by refiners.

In the interim North Sea crude prices, both prompt and forward, remained stubbornly high, pushing up prices for consumers and deterring Europe's less efficient refineries from running at higher rates.

For the reason of distances alone, pushing crude out to Asia will be even more difficult. Incremental barrels bought by Asian refiners will not arrive for months, leaving plenty of time for uncertainty, and high prices, to fester.

And that is before we consider the fact that Asia is already buying record amounts of West African crude as well as making regular purchases of North Sea grades.

Heavy Asian demand, likely linked at least in part to a scramble to build stocks in anticipation of a possible disruption to Iranian oil exports, has already kept regional marker Dubai crude at very strong levels.

Asian benchmark Dubai swaps have strengthened against Brent since the third quarter of 2011 as the recovery of the Libyan oil sector has alleviated supply concerns in Europe. But the Brent-Dubai exchange of futures for swaps DUB-EFS-1M, a measure of Asian demand for Atlantic Basin crude, has fallen to levels to allow huge arbitrage flows eastward since January.

"I DEPRESSED THE DUBAI SPREAD"

So what would the impact of a strategic stock release look like this year. As with last May, it would likely trigger a quick selloff in oil futures markets.

But once some of the speculative froth was flushed from the market, the main impact would probably be felt in a shift in the spreads between the prices of North Sea Brent and Asian benchmark Dubai swaps.

To push more oil to Asia, Brent has to weaken relative to Dubai but even if this is accomplished it is hard to see how this might be sold to voters still angry over high fuel prices.

Indeed it is conceivable that an IEA release could even allow more profitable Asian refiners to outbid European firms for Mediterranean crudes unless refining margins rose sufficiently.

That in turn could force up oil product prices for European consumers and further erode the benefits of lower crude prices.

More awkwardly, the United States may well only end up subsidizing stock building by Asian countries by selling off part of its oil reserves.

Despite the oil production problems in Yemen, South Sudan and elsewhere, the Iran crisis has so far raised more of a spectre of a supply shortfall than an actually supply crisis.

If so, the additional flows of oil from West to East may simply end up in tanks. And if these flows end up in strategic tanks rather than commercial inventories, the price impact could be further muted.

The real problem is that Western governments realized too late that they brought knives to their oil gunfight with Iran.

The mere fact that the West is talking about a strategic stock release shows that the Iran oil policy was a significant miscalculation and one that has handed the initiative in the energy sphere to the Islamic Republic.

Policymakers complacently thought that the fungible nature of oil would ensure that supplies harmoniously rebalanced to meet global demand, thus tweaking Iran's nose without hurting their economies.

Instead issues of logistics and security of supply, particularly in Asia, have come back to the fore, driving up the cost of crude and most likely offsetting at least in the short term much of the financial impact on Iran.

A policy of releasing Western strategic oil stocks to alleviate tightness in Asia risks foundering on similar logistical rocks. (Editing by Lisa Shumaker)

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