This action has the superficial appearance of a political move by the US government, related to gasoline and diesel fuel prices in the OECD. The alternate, and official reasoning, is that major forecasting houses, including DB, calculate that the "call on OPEC" (simply global oil demand growth less Non-OPEC supply growth) will be up more than 1Mb/d between 2Q and 3Q on seasonal and developing country economic demand strength. Saudi Arabia and its Gulf producer allies recognise this, but OPEC, under the presidency of Iran, refused to raise production at their recent meeting to accommodate the squeeze. It is well established that Iranian-Saudi relations are poor. This release is designed to prevent a spike going into 3Q.

But equally it roils markets by absolutely raising the question of how much spare capacity Saudi really has, including the knowledge that the Kingdom has become a major demand growth driver in its own right, particularly in summer. That raises the question, in tandem with a known move by Saudi to secure more rigs, even as they announced move to 10mb/d of production, of how much spare capacity there really is. Furthermore, assuming that Non-OPEC is producing all-out, how much spare capacity there is globally. The answer seems to be: less than you think.

Eoin Treacy's view Part of the reason there has been such a divergence between the price of Brent and West Texas Intermediate crude oil markets has been the differing supply situations between the USA and Europe. The removal of Libyan supply, at least temporarily, coupled with maintenance in the North Sea have put upward pressure on Brent. Excess supply at the Cushing facility in the USA has acted as a drag on WTI's advance.

The reasons behind the IEA's decision to release supply from its Strategic Reserve are probably rooted in OPEC's refusal to raise production even when prices have been in excess of $100 for a sustained period. The timing probably has much more to do with the USA's driving season. With only a week before the July 4th weekend US Average Gasoline prices are currently at $3.58, having hit a peak near $4 in mid May. It continues to revert towards the 200-day MA and a clear upward dynamic would be required to check potential for additional downside.

Brent crude hit a medium-term peak in April, while WTI hit an incrementally higher high almost a month later, but subsequently experienced a more abrupt decline. Downward dynamics have proliferated even as prices have spent the last six weeks unwinding overbought conditions relative to the 200-day MA. Both are somewhat oversold in the very short term so there is room for some steadying. However, sustained moves above $120 and $105 respectively would be required to check current scope for an additional test of underlying trading.