Crude Oil Market Intervention That You Should Know

Crude Oil Market Faces Intervention and Political Risks
Crude Oil Market Faces Intervention and Political Risks

Do you think that the current crude oil market is still a free market? We guess you should rethink about it after reading this article.

It is well-known that the New York (NY) crude oil futures already dropped to a level under USD$100 per barrel on May 5. The main reason was believed to be the intensive increase in margin requirement of Silver contracts by CME. The crash in the Silver market unavoidably dragged down the other commodities including the energy market.

On May 14, Barack Obama, the US President, announced to increase crude oil production at Alaska coast as well as Gulf of Mexico in the US, in order to pull down the soaring gasoline prices. On June 8, a proposal to raise crude oil production was turned down by Iran and its partners in an OPEC (Organization of Petroleum Exporting Countries) meeting. This proposal was originally submitted by Saudi Arabia, a key partner of the US in the Middle East.

Although the international crude oil prices already stayed well below USD$100 per barrel, the market intervention still has not stopped. On June 23, the IEA (International Energy Agency) aggressively announced to release totally 60 million barrels of oil to the open market by the next 30 days. The source of IEA oil actually came from the strategic petroleum reserves, and half of the release volume (30 million barrels of oil) was from the US emergency reserves.

It is truly not the first time that IEA decides to make a crude oil market intervention. This time is already the third time in IEA's history, and is believed to fight against OPEC for their earlier rejection of crude oil production hike on June 8, although IEA stated that its intervention is mainly intended to compensate for the supply disruptions during the Libya war and the corresponding impact on worldwide economic recovery.

Most people, however, trust that the IEA release action is aimed at raising oil supplies during the peak driving season in summer in the US. While some people also believe the action can reduce part of the political pressures on Obama when the US economy is slowing down, others even think that Obama is playing politics this time in order to help promoting his popularity during the next presidential election.

In any case, the IEA release action is the most obvious and severe intervention to the crude oil market in the recent years. You may now consider to change your mind if you still think that the crude oil market is a free market instead of a heavily distorted market. You may also be careful about the political risks for your energy market trading, not just consider the simple demand and supply rule in the crude oil market. Additional intervention to the crude oil market is still highly possible in the future because the US strategic petroleum reserves have already reached a historical high level.

Please find more (in table form) from our financial related stories at Financial Review 2011 Q2: Crisis Recurred. For commodities trading risks, in particular, you may also read: Glencore (GLEN.L) Assumes More Risks Than You May Expect.

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