By Greg Peel
Central banks across the globe are implementing and/or are expected to implement or increase monetary policy stimulus over coming months in order to reduce sovereign risk and prop up a flagging global economy. Markets have high hopes for ECB action, foresee possible increased Fed action, and expect ongoing measures from Beijing. Quantitative easing is also underway in the UK and Japan and may be increased, and elsewhere across the globe stimulus measures are being undertaken. The RBA has joined in with its current easing cycle.
It would be counterproductive were the oil price to keep rising. As the global economy's largest input, a rising cost of oil will only act against any monetary policy measures. It is inevitable, nevertheless, that increased global money supply must affect an increase in the face value price of oil. However there is another issue in the mix at present, unrelated to global economic woes, being sanctions imposed against Iran. As a response to Iran's questionable push towards nuclear capability, a US-led group of countries is imposing crude oil export sanctions on Iran and will step up those sanctions if Tehran refuses to accede to Western demands. Taking Iranian oil exports out of the mix leaves a big hole in global supply, and thus inevitable upward pressure on the oil price. A combination of monetary policy expectation and geopolitical tension has pushed the benchmark Brent crude price up from under US$90/bbl in June to over US$116/bbl last week.
Iran is still able to sell oil to friendly or neutral customers, so the impact of sanctions is undermined by the rise in the price Iran can achieve for the oil it does sell. This is what, according to a "source with knowledge of the situation", the White House is frustrated about, Reuters reports.
On that basis, the source suggests the White House is "dusting off" plans for a potential release of crude from the US Strategic Petroleum Reserve. Were such a decision to be made the release would not occur until next month as officials will first monitor movements in the price of gasoline following the Labor Day long weekend at the beginning of September. Gasoline prices typically fall after this weekend which marks the end of the summer driving season, and lower gasoline demand should translate into lower crude prices.
The last time the US released strategic reserves was early in 2011 when the Libyan civil war shut off production and left a hole in the global supply balance, sending the Brent price up towards US$130/bbl. On that occasion the US coordinated strategic releases with the Paris-based International Energy Agency, affecting joint releases from the UK, Germany, France and other members. The US has not yet contacted the IEA this time around, the source suggests, but when the oil price was last pushing up in May under the influence of Iranian sanctions the IEA was receptive to suggestions of potential releases.
It is nevertheless possible the IEA will not be as receptive this time around given the supply situation is not as tight as it was in May, the source suggests. Libya is back on line, Iraq is now producing more oil and Saudi Arabia has stepped up production. Germany and its neighbours have in the past generally resisted the release of government-held inventories except in the case of sharp and lengthy supply disruptions.
Japan and South Korea are also members of the IEA but are not expected to join any coordinated release given they are both sufficiently flush at present. South Korea, for one, has reduced imports but relies on Iranian imports ahead of other more costly measures, and thus has a level of exemption from full sanction terms. High prices alone are less likely to encourage releases from Asia as opposed to actual supply disruptions. While the level of global supply lost from Iranian sanctions is roughly equivalent to supply lost from Libya last year, the reduction has been slow and gradual rather than sharp and swift as was the case in the Arab Spring.
On the release of the Reuters report last Friday night, Brent crude fell US$1.56 to US$113.71. Last year the US and IEA released a coordinated 60 million barrels of oil and the price of Brent quickly fell 6%, from US$114/bbl to US$107/bbl. A week later, the price was back at US$114, however analysts believe the price could have risen much higher but for the release.
The Republicans have suggested any release of oil by the Democrat administration would amount to a political ploy to reduce US gasoline prices ahead of November's election.
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