BarCap barks at the IEA

Posted by Tracy Allowayon Jun 29 15:15.

The IEA slaps speculators … The speculators swat right back.

The FT has kept busy reporting how the International Energy Agency’s decision last week to release 60m barrels of oil reserves has burned some energy traders. In particular, trades based on the relative price differential between Brent crude and Dubai crude have apparently suffered, as the spread between the two has plunged to a six-month low, dropping nearly 50 per cent in just four days apparently.

Anyway, here’s Barclays Capital’s commodities team on Wednesday:

The IEA’s rationale to lower oil prices in order to support economic growth is flawed at several levels, we believe, not least due to the fact that stronger macroeconomic growth is perhaps the biggest catalyst for higher oil demand growth and hence higher oil prices. A form of economic intervention, IEA’s actions are likely to be fraught with the laws of unintended consequences. Indeed, in a world where both supply and demand responses are becoming more inelastic in nature, prices have to play a large role in helping to allocate resources efficiently. This involves not just incentivising new (costlier) supplies to come onstream but also to ration a level of demand. Given the limited opportunities for substitution out of oil in transportation in the near term, the importance of sending the correct price signal to encourage long-term substitutability through R&D and market incentives is paramount. The IEA’s intervention is likely to provide very little incentive, we believe, if any at all, to change consumer behaviour or encourage alternatives. In our view, it sets an untenable precedent in the market for the use of SPR as a means of lowering prices (irrespective of supply outages). Worse still, emerging market economies are often criticised for not allowing their consumers to face the true price of oil through heavy subsidies, thereby keeping demand inflated. We fear the IEA has done exactly the same in the OECD now.

Yeah. You tell ‘em, BarCap.

Related links:
Peak oil is not synchronous – Early warning
BarCap says speculators not to blame! – FT Alphaville, 2009

This entry was posted by Tracy Alloway on Wednesday, June 29th, 2011 at 15:15 and is filed under Capital markets, Commodities. Tagged with , , , , , .

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