SOME readers may be wondering about the impact of geopolitical events, and international policy developments, on oil prices and market sentiment.
Some may recall that, toward the end of June, the International Energy Agency (IEA) agreed to release 60 million barrels of oil for the month of July. At the time, this took capital markets by surprise – and oil price futures fell 6% as a result – and reverberated in the equity space, while Treasury yields retreated as well.
To provide some historical context, the International Energy Agency, it should be noted, was originally set up as a counterbalance to OPEC (the Organisation of Petroleum Exporting Countries) in the 1970s, on the suggestion of Henry Kissinger.
But in its almost four-decade history, this is only the third time that it has released strategic stock – and the first time it has done so since 1991, which was the period of the first Gulf War.
Essentially, the IEA has agreed to release two million barrels of oil per day for July, with the idea being to offset daily production losses from Libya. The US will provide half of this release, with the rest taken up by Japan, Germany, France, Spain and Italy.
The contribution is important to a market that is missing the high- quality light, sweet crude that Libya in particular produces. Light, sweet crude is used mostly for refining into gasoline – which is essential to industrialised countries, most of which have contributed in some way to the IEA release of reserves.
But readers may also have found the timing interesting: it was around two weeks after the OPEC meeting of June 8, where OPEC members states had been divided on whether to raise output, and from which countries (eg those with surplus production capacity, or those without).
Prior to this meeting, the IEA had publicly urged OPEC members to boost production in order to meet the rising demand for oil which is forecast for the third quarter (July-September) of 2011.
Meanwhile, in a different context, some have noted that the US presidential election campaign is kicking-off, and that the American economy is still in a “soft patch” – with US consumer recovery still relatively fragile.
As such, the increase in high- quality crude supply could help keep a lid on petrol prices, and may be helpful. In terms of timing, the move also coincides with the end of the US Federal Reserve’s Quantitative Easing programme (QE2) in June, and may potentially be viewed in the context of further fiscal stimulus.
In terms of near-term picture, we think that this move from the IEA is broadly positive: in fact, supply and demand fundamentals within the oil market for the third quarter of 2011 had been looking (and still look) tight, particularly if demand remains resilient, as we expect.
In regards to equity markets, we still broadly favour energy stocks.
A sector that is so correlated with oil prices could potentially provide investors with some protection against a number of still visible geopolitical risks and also potentially provide exposure to a sector with strong long-term fundamentals.
:: Andrew Miller is regional office head at Barclays Wealth in Newcastle
