Oil agency will free reserves if war starts

news.ft.com By Carola Hoyos in Paris Published: March 14 2003 22:12 | Last Updated: March 14 2003 23:55

The International Energy Agency, which co-ordinates oil stock releases, has given its first indication that its 26 members will tap into their strategic reserves in the event of war in Iraq.

Claude Mandil, head of the IEA, said consuming countries, as well as members of the Organisation of Petroleum Exporting Countries, would release stocks if military action disrupts oil production in the region.

"What we need to convey to the market is that the shortfall will be offset by both consuming countries and producing countries," he told the Financial Times.

Oil prices, up to almost $40 a barrel last month, have been falling sharply in recent days as it emerged that the campaign would start later than expected.

By Friday evening, April Brent crude was $1.27 lower at $30.38. The May contract fell $1.63 to $30.14. Any suggestion that the IEA members could release part of their 4bn barrels of stock could drive prices lower.

Mr Mandil insisted that the IEA would seek to counter the effects of any supply disruption. "If the market is tight, if the stocks are very low and if you have a sharp decrease of 2.5m barrels per day - which will be the case if Iraq and northern Kuwait were stopped - I would call it a supply disruption."

The fact that the agency appears ready for only the second time in history to release its oil stocks points to the imminence of war, analysts said.

In January 1991, the announcement that the IEA would release 2.5m b/d of oil from its strategic reserves coincided with the start of the air campaign. It prompted a record-breaking free fall in oil prices to $10.56 a barrel.

Friday's price fall was aided by comments from Spencer Abraham, US energy secretary. He said Washington reserved the right to make a unilateral release from its Strategic Petroleum Reserve without reference to the IEA. The US has about 600m barrels at its disposal.

The IEA said it did not believe the Opec cartel had enough spare capacity to offset the interruption caused by war. Conflict would affect Iraqi production of about 2m-2.5m b/ d and would probably cause a precautionary reduction of Kuwaiti output.

It warned of a potential shortfall of 1.68m b/d if the US went to war in Iraq in the second half of this month. That deficit would, however, drop to only 580,000 b/d if the Bush administration waited until April, when demand for heating oil is expected to drop as winter ends in the northern hemisphere. Saudi Arabia could also bring on stream its more inaccessible spare capacity.

How much oil the consuming countries will release will therefore be calculated on the basis of these assumptions and will depend on the timing of any war.