The tapping of emergency oil reserves by the International Energy Agency for the third time in history will not have the same negative impact on prices as it has in the past due to surging Chinese demand and supply outages in Libya.
US crude has already rebounded from the initial shock of Thursday's announcement, briefly rising more than $1 to above $92 on Friday after a near 5 per cent fall the previous session.
'It will have some transient impact, but in the big picture this is a little political thing and it will be a little hiccup in the market and then it will be gone,' said John Vautrain, director at Purvin & Gertz energy consultants.
The 28 member countries of the Paris-based IEA, formed in 1974 to protects consumers' interests following the Arab oil embargo, hold emergency stockpiles to be used in the event of an actual or potentially severe oil supply disruption.
The agency last used government-held stocks in September 2005 in the wake of Hurricane Katrina, sparking a near 20 per cent drop in US crude prices over the next two months. The market would not recover to its pre-hurricane level of $69.47 until April 2006.
Even more dramatically, the IEA's first dip into its emergency reserves in January 1991 during the Gulf War contributed to a 44 per cent drop in oil prices over a six-week period and helped start a long-term downturn in the market.
It would take nearly a decade for prices to return to $32 a barrel, the level before the IEA's action, due to a variety of reasons including a surge in global oil exploration and development.
Translated into today's market, US crude prices would fall to $78 from Wednesday's close of $95.41 under the 2005 scenario, while a repeat of 1991 would see prices plummeting below $54.
These scenarios, which would likely wipe out inflation worries for many countries and reignite global economic growth, could be far fetched
under the current environment.
'The drop in oil prices won't last as long as last time. It's going to be more like months, not years, before prices return,' said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.
US oil prices were seen rising to $103.39 over the next four weeks, said Reuters market analyst Wang Tao, as the bearish impact on prices from IEA's move was expected to be temporary.
Source : New Age
