(Robert Campbell is a Reuters market analyst. The views
expressed are his own)
By Robert Campbell
NEW YORK Feb 29 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
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
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
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
(Editing by Lisa Shumaker)