London, 24 June 2011

The IEA coordinated drawdown of 60 mmb in strategic oil stocks was prompted by fears that oil prices remained stuck at levels believed to be a significant drag on the global economy.

Over a 30-day period starting in July, the US will auction 1mmb/d of Gulf Coast light, sweet crude oil while Europe and OECD Asia will jointly release a total of 1mmb/d of products.

The IEA estimates that the unrest in Libya had removed 132 mmb of light, sweet crude oil from the market by the end of May- and expects Libyan oil will largely remain off the market for the rest of 2011.

Deutsche Bank calculate the need for OPEC crude oil will be up 1 mmb/d between Q2 and Q3 and another 0.5 mmb/d in Q4.  Saudi oil exports have been slow to rise, as has global refinery utilization.

"Supply and demand are rebalancing through lower economic growth ... The IEA interprets this situation as a market failure," say Deutsche. "The IEA sees their release as an effort to break the market logjam, while giving the Saudis time to gear up output and maybe buying a bit of time to see if the opposition forces in Libya can ship some oil".

It is a risky move according to Deutsche. " ... since it is a mostly short-term fix to a problem with many long-term components.  In our models, OPEC output must grow sharply again in 2012".

The IEA says it will reassess the oil market in four weeks to review the impact of their coordinated action and decide on possible future steps.

Deutsche believe the IEA may be tempted to extend the draw for an additional 30 days, but at some point expect that fundamentally tighter markets will force the IEA to surrender to higher prices.

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