IEA’s release of 60m extra oil barrels tagged as a ‘stopgap measure’

This is because oil demand from emerging nations such as China and India is still expected to remain strong.

OCBC therefore sees IEA’s release of emergency supplies to only have a short-term impact on the oil industry.

Here’s more from OCBC:

IEA releases emergency supplies. The International Energy Agency (IEA) announced last Thursday that its 28-member countries will be releasing 60m extra barrels of oil in the coming month in response to the ongoing disruption of oil supplies from Libya. This is the third time that IEA membercountry stocks have been used - the first was in 2005 after Hurricane Katrina damaged offshore rigs, pipelines and gas refineries and the second was during Iraq's invasion of Kuwait in 1990/1991.

The oil supplies, which should begin hitting the market around the end of next week, caused a knee-jerk reaction in markets following the announcement - prices of Brent crude
futures for August delivery have fallen about 9% ever since to US$103/bbl, while WTI prices have dropped about 5% to US$90/bbl.

Merely a stopgap measure. This development comes as little surprise to us, considering that oil consuming markets have been bemoaning the continued rise in energy prices and the detrimental impact on economies. The US will also be ending its QE2 program at the end of this month amid
still-weak economic growth and disappointing data. However, we expect this recent announcement to only have a short-term impact on the oil markets.

In addition, as most of the easy oil has been exploited, extraction costs are also expected to rise in the future. Indeed, the IEA
has forewarned that it does not exclude another decision to make additional supplies available to the market subsequently, should markets continue to remain tight.

Maintain Overweight. Hence, as much as share prices of oil and gas related stocks are correlated to movements in the oil price, we are not overly concerned about this latest development. In fact, we see it as a positive to keep oil prices in check so that economic recoveries do not get derailed; we would be comfortable with oil prices above US$80 as this level should still sustain capital expenditure in the sector. Meanwhile, we maintain our Overweight rating on the broader sector.

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