For policymakers, lessons from the 2011 oil release: Kemp

As officials from the United States and other oil-consuming countries contemplate another drawdown from strategic reserves, it is worth reviewing the lessons can be learned from last year's release and how it could be improved to maximise the desired effect on oil prices and availability.
The main lesson is that perceptions matter more than the actual number of barrels in shaping how the market responds. Clear communication and competent execution are crucial.
In 2011, the International Energy Agency (IEA) and its member countries failed to control how the release was interpreted in the media and among participants in the oil market.
The impact was blunted by confusion about the objectives; exactly what stocks would be released and where; what pricing and discounts would be applied; if and when stocks would be replenished; and confusion over key details such as the application of the Jones Act in the United States.
The IEA and stockholding organisations underestimated the speed of the media cycle and market demand for details as well as the instinctive hostility from many in the industry.
As a result, full details about the release were not available for days or even weeks after it was first announced, leaving a vacuum in which analysts and traders were free to speculate.
If the White House and other policymakers decide to order another release, they should ensure full details are worked out in advance and available for immediate release, so the IEA can maximise its control over the narrative.
VINDICATED
On June 23, 2011, the IEA announced its 28 member countries had agreed to release 60 million barrels of oil from emergency stocks in response to the ongoing disruption of supplies from Libya.
The release had an immediate impact on both outright prices and spreads. Spot Brent prices fell $7 on the day of the announcement, equivalent to a reduction of around 6 percent or 2.65 standard deviations, which was large but not exceptional compared with other recent one-day movements.
Premiums for the soon-to-expire August, September, October and November Brent futures contracts were crushed as fears about near-term supply shortages of light sweet crudes eased.
The spot price drop and the contraction in spreads proved temporary. Within weeks both had rebounded to pre-release levels. Nonetheless, IEA Deputy Executive Director Richard Jones told the U.S. Senate in January 2012 the agency felt vindicated.
"The release of stocks, particularly from the U.S. Strategic Petroleum Reserve (SPR), provided short-term liquidity in light-sweet crude and allowed the re-routing of export cargoes, otherwise headed to North America, back towards European refiners who most keenly felt the loss of Libyan feedstocks," Jones told the Senate Energy and Natural Resources Committee at a hearing on Jan. 31.
"We think the coordinated action by IEA members played at least a partial role in helping avoid a damaging price spike during summer 2011."
SYMBOLISM
The 30 million barrels released by the United States and another 30 million made available by other countries was equivalent to 46 days worth of Libyan exports or 67 days output from the North Sea Brent, Forties, Oseberg and Ekofisk (BFOE) crude streams deliverable against the Brent contract.
But it represented less than 1 day of global oil consumption (around 90 million barrels) and boosted combined OECD commercial stocks of crude and products by less than 2 percent (before the release they stood at a massive 2.677 billion barrels).
Whether 60 million barrels was enough to alter the supply-demand balance is therefore a matter of perspective and interpretation. It was a significant amount in terms of the expected market gap over late summer and early autumn for light sweet crude. But in terms of the global oil market, it was merely a drop in the ocean. No stock release could ever be sufficient.
CONFUSION
Many oil market participants are instinctively hostile to government intervention and believe it is both wrong in principle and doomed to failure.
Amid so much scepticism about its likely effectiveness, it was essential that the IEA and its members communicate clearly about how the release would work. In this area, the release failed. It was marred by widespread confusion.
For a start, there was no agreement on whether the IEA was trying to cap prices or relieve a temporary shortage of physical oil. As a result, there was confusion about whether to measure success in terms of the impact on spot prices or prompt premiums.
For several days, there was uncertainty about exactly what would be released and where. The United States holds crude in its strategic reserves, but most other consuming countries hold emergency stocks in the form of refined products such as gasoline and heating oil.
There was also widespread confusion about pricing. The United States succeeded in pushing the full 30 million barrels out into the market by offering crude at a small but significant discount to market prices, giving banks and oil companies a clear incentive to purchase it.
But many European countries insisted on offering refined products at market prices. Since there was no shortfall in physical supplies, some received no actual bids. Little or none of the oil that had theoretically been made available was actually sold.
The amount of oil actually added to the market proved far less than the 60 million barrels promised.
UNSOLD OIL
Complicating matters, in many consuming countries emergency stocks are actually held by refiners rather than the government. In effect, strategic stocks represent a minimum stock holding obligation above which refiners hold their regular operating stocks.
In some cases, the release was accomplished by lowering (on a temporary basis) the minimum stock holding requirement. No stock was actually released. Inventories that were formerly classified as "strategic" were merely reclassified as "commercial". There was no obligation to offer strategic stocks to the wider market.
The lack of incentives to offer physical barrels to the market was compounded by confusion about when stocks would have to be replenished.
Many European consuming countries began to refill their strategic reserves by early 2012, so more oil in 2011 meant a reduction in the amount available less than six months later.
U.S. JONES ACT
Finally, in the United States there was chaos over whether or not anyone bidding for SPR oil would receive a waiver from the Jones Act in order to be able to pick up their newly bought crude in a foreign-registered vessel.
In the end, all successful bidders who applied for a waiver received one. But the initial promise of a blanket exemption had to be withdrawn and replaced with a promise to review applications individually after it conflicted with political commitments made to maritime workers by the president during his 2008 election campaign.
Repeated amendments to the offering documents for the SPR release added to a sense the U.S. government did not know what it was doing.
Reviewing the experience of the stock release in 2011, a number of lessons are clear.
If policymakers decide to order another release, they need to work out the full details in advance; have a clear message about when stocks will be replenished; work out what to do about the Jones Act; and offer stocks at a discount to ensure extra crude and products are actually pushed out into the market.
Source: Reuters