BUSINESS

Markets Drop On News Governments Will Collectively Tap Oil Reserves

06/23/2011 11:51 am ET | Updated Aug 23, 2011

NEW YORK - Oil prices crashed more than $8 to a four-month low on Thursday after the world's consumer nations said they would band together to aid the global economy by releasing emergency oil reserves for the third time ever.

Oil prices fell to their lowest since the eruption of Libya's civil war in February stemmed exports from the OPEC member, putting a strain on global oil supplies. The International Energy Agency said it would help ease the strain by releasing 60 million barrels of government-held stocks, immediately increasing global supply by nearly 2.5 percent.

The move shocked traders who had been expecting the IEA to give top exporter Saudi Arabia more time to make up for the supply shortfall following OPEC's failed meeting on June 8, when other members blocked Gulf efforts to hike output.

"I'm really surprised. Everyone's been saying they've got enough stocks. This should keep WTI (U.S. crude) under $100 (per barrel), but really we want Brent there, and this should help," said Robert Montefusco, broker at Sucden Financial.

Brent crude futures for August plunged by more than $8 after the news, nearly its lowest intraday price since February 22. By 10:03 a.m. EDT it was down $7.41 at $106.80 a barrel, set for its biggest fall since a deep slump on May 5.

U.S. crude lagged the decline but still fell $5.20 to $90.21 a barrel, taking prices more than 20 percent below their early May peak at more than $114, the highest since 2008.

The move came as the oil market fell sharply amid worries over global fuel demand following higher-than-expected U.S. jobless claims, forecasts of lower U.S. growth and evidence of a slowdown in Chinese manufacturing.

New U.S. claims for unemployment benefits rose more than expected last week, a government report showed on Thursday, suggesting little improvement in the labor market this month after employment stumbled in May.

The sell-off also followed a move by the U.S. Federal Reserve on Wednesday to cut its growth forecasts for the world's biggest economy.

IEA EYES ECONOMIES

"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," said the IEA. It said expectations were that Libyan production would remain off the market for the rest of 2011.

"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," it said.

The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya's 1.2 million bpd exports and comes despite many views that the world is not immediately short of crude -- although many analysts and agencies also agree that markets will tighten later this year.

Against that backdrop, analysts said the use of the reserves now -- unlike the previous two releases, which immediately followed the first Gulf War and Hurricane Katrina -- signaled it may have been more concerned with tempering prices to aid a faltering economic recovery.

"The move is significant, as it represents a reach by member countries for the remedy of last resort to high oil prices," said John Kilduff, a partner at Again Capital LLC. "Clearly, the energy price spike is being cited as the reason for the economic slowdown and this is a reaction to that. The Libyan outage provides good cover."

(Additional reporting by Manash Goswami in Singapore and Christopher Johnson in London; editing by Lisa Shumaker)

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