Just over two weeks ago the International Energy Agency (IEA) announced the release of 60 mill barrels of oil from strategic reserves, in order to compensate for the loss of Libyan crude and to ease oil prices.
Initially, international crude oil prices fell with the news coming as a surprise to many oil market stakeholders, with some questioning how it will work, whether there really is a need for the release and will there be sufficient interest for this oil.
However, prices have since moved up again as investors’ focus has shifted from the IEA decision towards the medium term supply issues, reported Gibson Research in its latest weekly report.
The IEA has provided a detailed plan of how the stocks will be released. Half of the total amount will be available in the US and despite the initial market scepticism, the US Department of Energy has announced that its offer of crude oil from strategic reserves has been successful and oversubscribed. The net result is that 15 companies won bids for 30.64 mill barrels for a total of $3.3 bill.
Crude oil released from the US reserves could temporarily reduce US refiners’ appetite for sourcing crude from abroad. This would potentially have a negative impact on imports from West Africa, as these are of a similar light sweet quality.
The net result would be to free light sweet West African crude for additional shipments to European refiners, where the impact of the loss of the Libyan crude is felt the most, Gibson said.
To this end, these developments are bad news for an already extremely weak Suezmax market in West Africa as shorter voyages to Europe do not fully compensate for longer distance routes to the US, particularly the US Gulf.
In addition, there maybe insufficient European interest for West African crude. There is a chance that additional availability of crude in the Atlantic Basin could attract more Eastern buyers, prompting even longer-haul voyages, but at the moment the East/West crude oil price structure does not seem to support this.
In the longer run, if the US government decides to replenish its strategic inventories back to their pre-release levels, this will generate an additional demand for seaborne crude imports, but it will be some time off.
Perhaps the biggest hope for owners is that the stocks release leads to surplus oil and a return to floating storage. There are still a lot of uncertainties and some possible promise for owners, but for now Suezmaxes operating out of West Africa will have to continue to live with very weak earnings, Gibson concluded.
