World seeks lower oil price and gets its way for now.

24th June 2011

The International Energy Authority is releasing more oil this month – some 60million barrels – from world reserves to take account of the fall off in supply from Libya. This is only the third time the IEA has taken such action in its history.

The price dropped around 7 per cent on the news with Brent Crude dropping to near $105 a barrel.  

The news is reported here on specialist website Fundsweb.

The site gives some interesting background pointing out that "IEA members currently hold 1.6 billion barrels in emergency reserves and will sell just 60m. They are obliged to hold emergency oil reserves worth 90 days of net oil imports and have already stockpiled 146 days' worth."

The move follows the failure of the Organisation of Petroleum Exporting Countries to reach agreement about boosting production earlier this month – reported here on Yahoo News.  

Saudi Arabia had wanted to boost production but failed to secure agreement from other OPEC members including Iran.  

Here FT Alphaville gives the opinion of analysts who believe the IEA aiming some of its action at speculators.  

It reports Deutshcebank as saying "The IEA's action might be viewed as an effort to kick the system into a lower ($100/bbl) equilibrium that might be more supported by industry costs and consumer affordability. Arguably. the IEA is trying to rebalance risk in the oil markets- adding some positive supply uncertainty into a market that appeared to favor an "I can't lose being long" attitude on the part of speculators."

The price drop may also increase hopes that inflation could fall. Here the NASDAQ website quotes a Korean finance official saying just that.

"Over the near term, oil will be imported at cheaper prices, which will help tame inflation to some extent" said Yoon Jong-won, director general of the economic policy bureau at the Korean finance ministry.

But back in the UK, not everyone is optimistic about a price fall. The Daily Mail has been slating the great fuel rip off here.

It quotes AA head of public affairs Paul Watters suggesting that drivers are unlikely to see an equal drop in the price of fuel – even if supermarkets provoke a mini-price war.

He said: "In March this year, the average UK price of petrol levelled off at 133.5p a litre when oil hit a plateau of $115. Yet when oil returned to $115 in early to mid May, petrol dropped to only 135.75p – even with the benefit of the fuel duty cut in April. We hope this oil price crash will lead to a price war on UK forecourts, but we remember post-Hurricane Katrina when a 4p drop in wholesale petrol prices took nearly three months to be reflected in its entirety at the pump."

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