Oil prices tumbled 6 per cent on Thursday after the world's biggest consumers released emergency oil reserves for the third time ever, a surprise intervention to aid the struggling global economy.
Oil briefly hit the lowest since February after the International Energy Agency said it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 per cent for the next month.
The move -- only the third in history -- shocked traders who had been expecting the IEA to give top exporter Saudi Arabia more time to make up for the supply shortfall following OPEC's failed meeting on June 8, when other members blocked Gulf efforts to hike output.
"It comes after the Saudis said they would increase output so it suggests they think this might not be enough," said Helen Henton, head of commodity research for Standard Chartered Bank. "I think it will knock prices lower. I expect prices to be lower a month from now."
Goldman Sachs, whose oil price forecasts are closely watched by markets, said the release of the IEA oil could knock prices for Brent crude down by $10 to $12 (U.S.) a barrel.
Brent crude futures for August plunged by more than $8 after the news, nearly hitting its lowest intraday price since Feb. 22, before paring losses to trade down $6.88 at $107.33 a barrel at 2:42 p.m. ET.
U.S. crude lagged the decline as traders bet the relaxation of European oil reserve requirements would have a more direct and immediate impact on London Brent. August U.S. crude dropped $4.39 to settle at $91.02 a barrel, taking prices more than 20 per cent below their post-2008 high above $114 in early May.
BRENT HIT HARDEST
The deeper drop in Brent pushed the London grade's premium to U.S. oil to just over $16 a barrel, off more than $2.80 a barrel from Wednesday. As part of the action, the United States will release 30 million barrels of crude from its Strategic Petroleum Reserve, specifically light sweet oil.
Brent trade volumes surged to a record high, hitting 1.13 million lots trading just ahead of the settlement, nearly 2-1/2 times the 30-day average. U.S. volume hits 875,000 lots traded, 26 percent over the 30-day average.
The Brent futures curve flattened on the news, with the premium of the August contract to the September contract to 9 cents, down from 45 cents on Wednesday and reflecting an increase in prompt supplies.
Oil markets were already off sharply ahead of news of the release, due to worries over global fuel demand following higher-than-expected U.S. jobless claims, forecasts of lower U.S. growth from the Federal Reserve and evidence of a slowdown in Chinese manufacturing. The economic concerns helped push investors out of gold, down 2 per cent on the day, while other commodities showed smaller losses.
The sell-off also followed a move by the U.S. Federal Reserve on Wednesday to cut its growth forecasts for the world's biggest economy.
IEA EYES ECONOMIES
"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," said the IEA. It said expectations were that Libyan production would remain off the market for the rest of 2011.
"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," it said.
The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya's 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude -- although many analysts and agencies also agree that markets will tighten later this year.
The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve -- the same quality that markets have lost due to the Libya disruption.
"The timing on the release of the emergency oil reserves is just right as the lack of Libyan crude in the market is the last piece of the bearish puzzle," said Phil Flynn, analyst, PFGBest Research in Chicago.
Against that backdrop, analysts said the use of the reserves now -- unlike the previous two releases, which immediately followed the first Gulf War and Hurricane Katrina -- signalled it may have been more concerned with tempering prices to aid a faltering economic recovery.
"The move is significant, as it represents a reach by member countries for the remedy of last resort to high oil prices," said John Kilduff, a partner at Again Capital LLC. "Clearly, the energy price spike is being cited as the reason for the economic slowdown and this is a reaction to that. The Libyan outage provides good cover."