This preemptive action was very different from foreign exchange intervention commonly executed by one or two central bankswhen the markets steer FX currency values away from best interests of implied trade policies. The IEA’s intervention wascoordinated among State and Energy Ministries in the US, Europe and Asia (including China). The reason for the interventionseems to have been overtly political and geopolitical, and occurred when energy prices were already well-below their highs.The day before the IEA’s announcement, researchers at Strategic Energy Research and Capital produced the following insight:“According to the IEA STEO release on Absolute OECD Storage, comparative inventory, as we calculate, is already indeficit at -19 million barrels. If we are to believe the IEA, for the balance of 2011…comparative inventory (of Brent toWTI) will decline further to a deficit of -85 million barrels, with the largest net decline occurring next month. As wecan see, in U.S. Dollars, this should increase the price of Brent relative to WTI, and it has. The interesting aspect of the OECD trend in comparison to the U.S. is that the markets are both responding to respective available supply asreflected in Absolute Inventories calculated into Comparative Inventory (i.e., the market is rational, at least tous). The OECD is net short, that is a fact, and that includes the U.S. barrels, while the U.S. separately is still insurplus. So we are not surprised to see the Brent-WTI spread widen, as so many are fixated on lately. From our seat,the regional market gears are working smoothly.
The globe is still short to the tune of 1.0-1.5 million barrels per day and no new meaningful supply will be added before 2015, as we forecast it
Although WTI crude is stored at Cushing and used as the basis for futures trading in the US, making it the benchmark oil pricefor most
financial asset investors
, the price of Brent crude greatly influences gasoline prices across the world (including the USdue to refining channels). So then an imminent price spike of Brent in particular and global crude in general seems to have beentemporarily averted by the IEA intervention, which served to frighten weak hands out of the market.The perception among some financial asset commentators that recent oil prices contained a significant speculative premiumseems a bit off the mark. Unlike past bubble pricing in financial assets, crude oil futures potentially have an element of reality tothem because arbitrage opportunities exist between notional and delivery pricing when spreads get too wide. Within thiscontext, consider the long term trend. WTI futures reached a peak of $145/barrel in 2008 before plunging to $45/barrel, tradedmostly above $80/barrel since June 2009, above $90/barrel since December 2010, and above $100/barrel from Februarythrough mid-June of this year.
Crude oil is in the midst of a multi-year bull market based on fundamentals
. It should not besurprising that it took only two weeks for WTI and Brent crude futures to rise back to the levels at which they were tradingbefore the IEA’s intervention.What are the fundamentals? When the US and Europe began printing base money in earnest three years ago, equilibriumpricing for crude oil has risen consistently. As we have argued, there is a direct correlation linking the process of base moneygrowth to higher resource pricing because resource manufacturers demand equal
for their products and services(the nominal prices of their goods are determined in relation to the ongoing purchasing power of the currency they receive inexchange). The marketplace is implying that a price range of $95 to $130/barrel is where supply meets demand (WTI & Brent)
at the current level of global base money
. Unenlightened market speculators are anchored by past nominal pricing – pricingunadjusted for past currency debasement.The fact remains that the magnitude of the IEA’s intervention was relatively trivial. Sixty million barrels amounts to only about70% of
production. While crude oil pricing is established by each marginal barrel over demand, the fact that it is to bereleased over time suggests there might be a million barrel daily surplus for a couple of months. All things equal, it would seemreasonable to expect a change in WTI pricing to, say, $105 - $115 (the middle of our assumed equilibrium range) as the IEAsurplus runs off. (Of course, the IEA can always intervene again.)It should be obvious to all that “speculation” does not drive prices higher in any meaningful way. For every buyer of crudefutures there is a seller. If one wants to blame financial markets for higher gas prices at the pump then one should blame highlevels of overall market sponsorship, which derives directly from high levels of investor leverage, which in turn is generateddirectly by banks through their lending and prime brokerage divisions, which ultimately derives from easy global monetaryconditions. Blame the Fed and the BOE.