Oil at $100 No Spur Yet to Release Strategic Stockpiles

Oil at $100 a barrel isn’t a sufficient trigger for the U.S. and other crude-consuming nations to tap emergency reserves.

West Texas Intermediate, the main U.S. oil grade, is too narrow an indicator of global markets to prompt a release, and policy makers will instead look for North Sea Brent to recover to more than $120, Citigroup Inc. and Societe Generale SA said. Gasoline is more likely to spur a decision than WTI, especially as U.S. presidential elections approach, should pump prices rise as high as $4 a gallon, from about $3.86 now, Barclays Plc said.

Speculation that central banks in the U.S. and China would enact stimulus measures combined with tension over Iran’s nuclear program pushed WTI to a four-month high of $100.42 on Sept. 14. The Group of Seven nations said on Aug. 28 that strategic stockpiles may be needed to curb prices. Brent plunged 6 percent on the day of the last release, in June 2011, implemented to make up for supply lost during Libya’s armed conflict.

“WTI is somewhat divorced from global market fundamentals,” Seth Kleinman, head of energy strategy at Citigroup Inc. in London, said by phone on Sept. 17. “Brent trading above $120 for a few days is the green light that they will be looking for. You’ll be hard-pressed to find a macro- economist who’ll tell you you’re not doing some damage to the global economy at these levels.”

Three-Minute Plunge

WTI crude traded as high as $96.17 a barrel in electronic trading today on the New York Mercantile Exchange, rebounding from yesterday’s tumble to $95.29, having plunged $2.38 on Sept. 17 in a loss concentrated in three minutes of trading. Brent, used to price more than half the world’s crude, rose as high as $112.98 today after closing yesterday at $112.03 on the ICE Futures Europe exchange in London.

Eighteen of 24 energy analysts and traders surveyed this week said that WTI’s breach of $100 won’t provoke a release of strategic stockpiles. The U.S. Strategic Petroleum Reserve, with a capacity of 727 million barrels, is the largest stockpile of government-owned fuel in the world.

The G-7 said on Aug. 28 it may call on the International Energy Agency, a 28-member group of consuming countries, to draw on its reserves to ensure adequate supply. IEA nations made 60 million barrels of crude and refined products available on June 23 last year, to make up for halted Libyan output.

Fragile Economy

“Given the extent central banks have gone to boost growth, it makes sense that other efforts such as a reserve release are in the cards,” said John Kilduff, a partner at Again Capital LLC, a New York-based energy hedge fund, and one of the six respondents in the survey who expects a release. “The fragility of the global economy will prove to be sufficient cover for countries to release barrels.”

White House spokesman Jay Carney told reporters yesterday at a briefing that “all options remain on the table” with regard to the SPR.

The U.S. has tapped the SPR 17 times since 1985. Four of those were directly related to hurricane damage. The biggest release was last year’s, when the SPR contributed 30.6 million barrels, followed by a 17.3 million barrel sale in January 1991 tied to Operation Desert Storm, when U.S.-led forces invaded Iraq to liberate Kuwait.

High Price Concern

The IEA has repeatedly said this year that an actual supply disruption would be needed to justify a coordinated release by member nations. The Paris-based agency said in a Sept. 12 monthly report that inventories in industrialized levels are at “comfortable” levels.

Still, IEA Executive Director Maria van der Hoeven told reporters in New Delhi on Sept. 4 that “high prices are always a concern, to the IEA members and also to others.”

A decision will first require “formal communication, or high-level informal communication” between the U.S. and Saudi Arabia, the world’s largest crude exporter, Citigroup’s Kleinman said.

Saudi Arabian Oil Minister Ali al-Naimi said Sept. 10 that global supply, demand and inventories don’t justify recent price gains, while a Persian Gulf official who declined to be identified said yesterday the kingdom is working to bring prices down.

Using the strategic reserves may leave President Barack Obama open to criticism of influencing energy prices for political gain before the Nov. 6 election, said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. Emerson said WTI oil at $100 won’t trigger a release.

WTI’s rally last week “has the psychological sticker of $100 but doesn’t carry an awful lot of information,” said Paul Horsnell, head of commodities research at Barclays.

Crude at $100 is “a small green light,” Horsnell said by phone from London on Sept. 17. “If the national average for gasoline reached $4 a gallon, or looks like it’s going to go through there, that’s probably a bigger light.”

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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