The Visible Hand - Now comes intervention in oil markets :: Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


The Visible Hand
Now comes intervention in oil markets
Event
 The International Energy Agency announced a release of oil reserves.
Impact
 Concern over rising commodity prices is now being expressed in many forms.
Warnings about commodity ETFs in April and the World Bank’s proposed
hedging of food prices by poor countries are just two examples of these
concerns.
 It has been suspected for some time that the US in particular wants a lower oil
price. The political imperative to boost US growth well before the elections of
November 2012 has added a sense of urgency.
 Intervention in the oil market is just more one sign of the determination of key
policymakers in the US to boost economic growth. This will be an important
offset to tighter monetary policy in emerging markets.
Analysis
 The International Energy Agency (IEA) announced that 60 million barrels of oil
will be released over the next 30 days from the emergency stocks of its
members. This was rationalised on the view that the absence of Libyan oil
from the market could create a problem as demand for oil rises over coming
months.
 It is doubtful that this is the full story. Over recent weeks there have been
veiled hints from the US that it could authorise a release from its Strategic
Petroleum Reserve. Saudi Arabia has also made it clear that it wanted to
boost output to lower the price of oil. This would not be the first time that the
Americans and the Saudis have got together to control the oil price although
there is no real evidence yet of such coordination.
 There is certainly a compelling political reason for the US to push oil prices
lower. Weaker economic data in the US recently must be causing some
concern within the Obama administration. Getting re-elected in November
2012 is not going to be easy. Getting the US economy up to full steam will be
imperative and policies will need to be in place now to ensure stronger growth
in 2012.
 One question that could be asked of the IEA is why there was no release of
reserves in 2008. At that time the prices of both West Texas Intermediate
(WTI) and Brent were considerably higher than they are at the moment. As
well there was a large fall in the WTI price in early May 2011 and so the
pressure for a release of emergency stocks should have eased if anything.
 One possible answer is that policymakers are now more sensitive to the risks
to economic growth in 2011 than they were in 2008. This sensitivity may have
been heightened by recent softer economic data. But it is also worth bearing
in mind that in 2008 the US president was not standing for re-election and the
political dynamics are very different in 2011.