Oil plunges after reserves release
International Energy Agency’s emergency supply tapped for just third time in 37 years
FRENZIED trading saw oil drop by over six per cent yesterday, after the International Energy Agency (IEA) said it would release 60m barrels of emergency reserves in the next month, “in response to ongoing disruption of oil supplies from Libya”.
Brent crude sank to $107.14 (£75.63) per barrel, close to $7 down on the day, while US crude sank close to $91 a barrel, down roughly five per cent from the day’s high.
The news sent a chill through markets, helping to send the FTSE dropping 1.7 per cent to its lowest close since 16 March, when markets were plunging in the aftermath of the Japanese earthquake.
The Dow fell over one per cent immediately after the news, while the S&P 500 Index shed 1.4 per cent to hover dangerously near its 200-day moving average. Positive news on the Greek budget, however, helped the US markets pare losses.
Weak employment data for the US also dented stocks across the pond, while poor services and manufacturing data in the Eurozone was partly behind the euro crashing to an all-time low against the Swiss franc.
Goldman Sachs said Brent crude could fall by $10-$12 a barrel by the end of July, after the surprise announcement from the IEA.
It marked only the third time that the IEA has unlocked emergency reserves since it was founded in 1974 in the wake of the Arab oil embargo.
The Gulf War (1990-1991) and Hurricane Katrina (2005) prompted the two previous occasions when supply was disrupted enough to convince the IEA to release millions of barrels per day in reserves.
The release stoked political feuds, with Republicans and the oil industry accusing President Obama of voting for the measure to boost America’s sluggish recovery.
“This action threatens our ability to respond to a genuine national security crisis and means we must ultimately find the resources to replenish the reserve – at significant cost to taxpayers,” said Republican politician John Boehner.
The move also puts pressure on oil cartel Opec, which earlier this month failed to decide whether to release more oil into the market.
Some analysts said the release could temporarily ease inflationary pressures in the West. Growing inflation in Europe and the US has seen central banks, particularly the Federal Reserve, come under fire.
A drop in the price of oil to $95 per barrel would wipe half a percentage point off inflation forecasts in the UK and Europe over the next 18 months, according to Alan Clarke of Scotia Capital. “For the Bank, this could contribute to further delaying the first interest rate hike, and may add to speculation of another round of quantitative easing,” he said.