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Oil stock release looks chaotic, could backfire

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Just a week after the West's energy watchdog announced the release of millions of barrels of oil, forcing a drop in the oil market, prices are almost back to where they were and analysts say the policy is chaotic and could backfire.

Far from depressing prices and rescuing a fragile economic recovery in the industrialised world, the release of strategic oil stocks is piling more misery on refiners, and has raised expectations of increased supply that may not be realized.

The release by the International Energy Agency (IEA) is badly coordinated, oil traders say, and may not be completed.

"In a couple of days the IEA plans for release of 60 million barrels of oil have moved from looking well planned and thought through, to ill-conceived and poorly organised, except perhaps in the United States," said Philip Wiper, director of brokers PVM Oil Associates.

IEA officials were not immediately available for comment.

Oil prices tumbled immediately after the announcement of the stocks release on June 23 as funds sold, forcing North Sea Brent crude futures down almost $7 US per barrel on the first day and down to a low of just above $102 by Monday.

Four days later, prices have snapped back above $113 and are still rising with traders saying the "IEA effect" has been almost completely absorbed and discounted by the market.

Strategists and analysts say one key problem with the IEA release is that it is being disbursed in various different ways and by many different organisations. Some of these are very well organized, others are not.

In the United States, the Department of Energy (DOE) has already started a tender process to sell 30 million barrels of crude from the Strategic Petroleum Reserve and details of the locations, timing and qualities included were clear almost immediately after the first announcement.

Traders say the disbursement of these crudes, mainly light and low sulphur grades well liked by the market, is likely to have the desired effect on the market, dampening crude prices, especially if the DOE sells the oil aggressively.

"NO OBLIGATION"

Arrangements in many of the other 27 IEA member states are quite different. In Europe, many of the oil stocks released will be oil products, some of which are already abundant.

"Out of the remaining 30.6 million barrels, we see less than 8 million barrels being pushed into the market,"said Lawrence Eagles, global head of oil research at JP Morgan and a former IEA official. "The method of sale, and the lack of guidance on refilling, work against the barrels being used."

Traders and end-users are not obliged to buy the oil being released from stocks, and many do not expect to.

British firms holding emergency oil stocks have no obligation to tender or release them, a spokesman for the Department of Energy and Climate Change (DECC) said on Thursday, indicating the oil may never leave storage tanks.

"They have an obligation now (to hold stocks) and we are releasing them as part of that obligation. If they don't sell it, they don't sell it," said DECC spokesman Cameron Ramos.

Analysts say many of the IEA stocks are unlikely to be sold unless they are priced well below the market.

"I see no need for sales in the United States as supplies are not tight there at all. I wouldn't be surprised if the 30 million barrels won't be retrieved completely," said Carsten Fritsch, commodity analyst at Commerzbank in Frankfurt.

Uncertainty over the release of oil products into the market could depress refining margins and cut supplies to customers in some regions, Eagles said.

"Refining margin volatility caused by the lack of clarity on the IEA release volumes risks reducing, rather than supplementing, European product supplies," he said.

Wiper at PVM says the full amount of 60 million barrels is "certain not to appear in the market".

This would be reassuring for Abdullah al-Badri, secretary general of the Organization of the Petroleum Exporting Countries, who on Monday demanded an immediate halt to the IEA action designed to force down crude prices.

"It's perhaps not so surprising that we've turned a full price circle. It's not surprising either that OPEC Secretary General al-Badri seems much more relaxed."

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