War of words rages between OPEC and IEA
Rebukes from OPEC president and secretary general follow EU summit
In the latest development since OPEC's failed meeting on 8 June, members of the producers' cartel have made clear their strong disapproval of the International Energy Agency's (IEA) plan to place 60 million barrles of oil onto international markets over the next month.
The IEA last week ordered the release of emergency stocks for only the third time in its 37-year history after OPEC failed to agree an output increase to offset lost Libyan oil.
OPEC Secretary-General, Abdullah al-Badri, fresh from OPEC's meeting with the EU, today criticised both IEA's intervention and the quantity of oil being released.
“I hope this practice will be stopped and stopped immediately," al-Badri said, according to Reuters. "We don't see a good reason to release this quantity and I hope the IEA will refrain from using this practice.”
Iran's oil minister and current OPEC President Mohammad Aliabadi yesterday accused the IEA of violating "principles" that limit when energy-consuming countries can tap reserves.
"They, the IEA, have these principles. Why are they not abiding by those principles?" he said, reported Dow Jones Newswires. "Instead they are intervening in the market," Aliabadi said. "We believe that prices have to be set by markets."
Alibabadi's comments, which preceded a formal energy dialogue between OPEC and the European Union later yesterday, underscored how the IEA's controversial emergency release is straining relations between producers and consumers. The remarks came amid new signs yesterday that suggested OPEC member Saudi Arabia will continue to raise output and as the IEA disclosed new details about its emergency release of oil.
Aliabadi said the IEA's move flouted the agency's commitment to respect market forces. His comments echoed other remarks in recent days by figures from the Organization of Petroleum Exporting Countries, who have said the IEA's move was aimed at lowering oil prices, not in responding to a true oil supply crisis. OPEC produces about one-third of the world's oil and meets regularly to try to influence oil prices.
The IEA's gambit is thought to have been spurred heavily by the Obama administration, which is desperate to see improvements in the economy after a the latest data indicate the US recovery has stalled. Under the IEA plan the US will contribute half of the total oil put to market.
A Reuters report claimed that tha US and Saudi has met in secret in advance of June's OPEC meeting with a view to a swap deal that would see the US's stategic reserves sent to the European refering sector and replaced with Saudi heavy crude.
The release of 60 million barrels of oil from emergency stocks after Saudi Arabia's pleadge to pump "whatever the market needs" has led some analysts to doubt the Kingdom's capacity to produce enough high quality crude to lower and stabilise prices.
Christof Ruehl, chief economist at the BP, said the IEA's market intervention could create upward pressure on prices if OPEC cuts supply in kind.
"The single biggest risk up is that there is a war of attrition between OPEC and the IEA which goes on for a long time and leads nowhere," Ruehl told Reuters Insider.
Other commentators seriously doubt the ability or desire of OPEC countries to reduce production. Robin Mills, Non-Resident Scholar at the Institute for Near East & Gulf Military Analysis and columnist at the National, told Oil & Gas Middle East that Iran needs the revenue from current rates of production, and with a 15% cut in Iranian production equivalent to 30% of total exports, countering the IEA would be tantamount to "economic suicide".
As such producers such as Iran and Venezuela are locked in to maximum production and have no room to play gesture politics with their exports.
Ruehl also sees the potential for OPEC to lose it's fiscal discipline by overproducing, which will lead to a slump in prices that cause members fiscal problems. "That is how the cartel eventually breaks up and prices go to lower levels for awhile," he said.
But Ruehl said he was looking at "theoretical extremes" when he spoke of a war of attrition between OPEC and the interests of the consumer countries represented by the IEA.
"I think at least for the medium term we will see a settlement in between the peaks the oil price had recently, and what seems to have been OK with major consumer companies about a year ago."
Brent crude was trading in the neighbourhood of $80 in the second quarter of 2010.
Ruehl said the IEA stock release would cover the loss of exports from Libya, where a standoff between the government of Muammar Qaddafi and rebel forces has left the country's export outlets dry.
"Will it be enough to satisfy the other 2 billion barrels (of additional demand)? That is the question," Ruehl said.
"If markets had stabilised at USD 110-USD 115, people don't realise that it would have been the highest average annual oil price ever in nominal terms and real terms this year. This century it was never above USD 100. So that threatened the U.S. recovery.
Concerns about Greek debt and its influence on Eurozone demand are overrated, Ruel added.
"The eliminations of many subsidies from Chinese demand are going to dwarf anything that happens in Greece," he said.