Oil price will fall only slightly if US releases reserves

PETALING JAYA: The prices of crude oil will only drop slightly should the United States decide to release part of the country's 727 million barrels under its Strategic Petroleum Reserve (SPR) to support the still fragile economic recovery.

Singapore-based analysts told StarBiz that the surging prices of oil were not due to a supply crunch but concerns over troubles in north Africa and the Middle East, which accounted for nearly two-thirds of proven oil reserves.

Oil prices have gone up since the beginning of the year with West Texas Intermediate (WTI) trading on the Nymex rising nearly 14% to US$106 a barrel while Brent crude has surged more than 23% to trade at nearly US$117.

Purvin & Gertz Inc senior principal Victor Shum said the impact from a decision to tap into the SPR would be minimal.

“There may be some impact on sentiments but the rally in prices is driven by concerns that the protests engulfing various countries in north Africa and the Middle East will spread,” he said.

White House Chief of Staff William Daley had said President Barack Obama might consider tapping into the oil reserves as an option to support economic recovery.

However, there was no indication as to when the Obama administration would decide to draw from the reserves.

The SPR, which was established in the mid-70s following an embargo imposed by the Organization of Petroleum Exporting Countries on the United States, has been drawn upon twice - during the first Gulf War in 1991 and after Hurricane Katrina devastated oil production facilities in 2005.

Phillip Futures Pte Ltd analyst Ong Yi Ling said the Obama administration could be pressured to release reserves if WTI oil rose above US$110 on a sustained basis despite there not being a shortage of oil.

“Should the United States announce a release of oil reserves, WTI may retreat below US$100 on profit-taking activity,” she added.

However, on a longer-term basis, Ong said sentiments would continue to impact prices.

CIMB Investment Bank Bhd head of economics Lee Heng Guie said sustained high oil prices would put a damper on economic activities, corporate earnings and fuel inflation.

“While it is difficult to predict how the events in the Middle East will pan out, the current price increases and the possibility of more increases have drawn attention yet again to the threat they pose to the global economy,” he said in a Feb 24 report,

Lee said the impact of higher prices on emerging economies would depend on the extent of each country's oil intensity and dependence on oil imports.

“High oil prices will have a positive impact on net exporting countries though these benefits may be offset by negative effects elsewhere. For net oil importing countries, the impact will depend how much they consume,” he added.

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