IEA's 'Quantitative Easing' Could Backfire

Sri Jegarajah|Reporter, CNBC Asia Pacific

The International Energy Agency's decision to release 60 million barrels of oil from strategic reserves is a form of 'macroeconomic stimulus' that may backfire by actually sending prices higher in the medium term.

Worried about the anemic economic recovery in the developed world, the IEA release represents nearly 2.5 percent of global supply, with half the extra oil coming from the U.S. strategic petroleum reserve.

Immediately following the IEA move, Goldman Sachs forecast Brent crude could fall even further by between $10 and $12 a barrel. On the flipside, many argue that the effect of lower energy prices could feed into a stock market rally, boosting confidence and paradoxically sending the price of oil back above $100.

"Definitely a game changer," said Tom Weber, Managing Director at PFGBest of the IEA release. "I will continue to be short oil until $85 - $80, then wait for a signal to enter long."

Other traders also shared the view. Daryl Guppy, CEO of said the IEA move was "a one-off and does nothing to dent China demand. Look for retest of $100 and higher before end of 2011. Trade short, too soon to fade the downtrend."

QE by Stealth?

Greg Priddy, global oil analyst at Eurasia Group said the reasoning behind the decision "represents the use of strategic oil reserves as a means of macroeconomic stimulus."

Andre Julian, Chief Financial Officer at OpVest went further suggesting "perhaps President Obama used his authority to artificially push the price of crude down in the short-term because the Fed has used up the arrows in their quiver."

"With QE2 coming to an end, a very pessimistic view given by Bernanke on the pace of the recovery, and not much commitment to extend stimulus in the short-term one of the best ways to help the economy recover is to lower the price of oil by injecting supply into the market," he added.

Political Decision?

Dennis Gartman said the U.S. contribution to the reserve release was not insignificant and argued that it was done with one eye on ensuring President Obama's re-election in 2012 since U.S. consumers were still reeling from a surge in gasoline prices. "This was a political decision entirely, and nothing more," Gartman said.

The consensus view amongst traders and analysts was that the IEA release wasn't supported by the fundamentals of a well-supplied global oil market. "Yes, we have some Libya premium still in the market but we are not massively short of crude supply," said Tom James, Director & Co-Founder at Navitas Resources Pte Ltd.

"Understanding the move today was like trying to solve the Rubix Cube in the dark," said John J. Licata, CEO and Chief Commodity Strategist at Blue Phoenix Inc. "Adding so much oil to the marketplace when there is no rise in demand was troubling. At the end of the day this was a Fed-like move focused on pricing to help get the Europeans and the U.S. out of a jam (politically and economically). This was a wasted bullet that wasn't even used when crude oil was above $140 a barrel."

Jonathan Barratt at Commodity Broking Services agreed that there was no need for the extra oil since prices were "going down on its own accord." The reserve release was "an aggressive move to lower primary inputs to grow western economies faster...a dangerous game when eastern economies are trying to slow down," he added.

Dhiren Sarin, Chief Technical Strategist Asia-Pac at Barclays Capital, offered the technical perspective: : "Oil led the sell-off in risk appetite in early May and such bearish price action does not bode well for market confidence. A break below $104.50/105.00 in Brent crude also would be a negative potentially implying that a large four month top is completing; would be watching price action around those levels closely."