Brent crude rebounded to $108 on Friday from its lowest settlement since February as traders gauged how much supply would reach the market from an IEA-coordinated release of emergency oil stockpiles.
Prices tumbled more than 6 percent on Thursday, when the International Energy Agency announced the release. Brent rebounded by $1 on Friday to $108.26 a barrel by 0630 GMT, but was still headed for a weekly drop of almost 4 percent. U.S. crude climbed 81 cents to $91.83.
The use of emergency stockpiles four months into the disruption of Libyan exports surprised markets and highlighted the deepening concern among OECD nations over the damage of high energy costs to a worsening global economy.
J.P. Morgan cut its Brent forecast for the third quarter to $100 a barrel from $130, but warned that if consuming countries find little appetite for their petroleum release, or find it is having too large an effect on prices, they can limit the volumes sold.
Most of the impact of the IEA decision on prices is related to the partial removal of a $15 risk premium factored in after Libya's outage thinned the cushion of spare production capacity held by OPEC countries, said Ben Westmore, a commodities analyst at National Australia Bank.
I don't think the fundamental game has changed too much, and given the big drop we saw yesterday, some marketers are fearing the same and buying on the weakness, Westmore said.
If you look at the world at an aggregate level, there is no doubt that, while there are pockets of tightness, there are sufficient supplies to meet demand at the moment.
The IEA said it would make available 60 million barrels of government-held stocks in the global market over the next 30 days, immediately increasing world supply by some 2.5 percent for the next month, and sending prices spiraling down, with U.S. crude erasing all of the year's gains.
The move, which marked only the third time that the IEA has used the release mechanism, shocked traders who had been expecting top exporter Saudi Arabia's decision to unilaterally pump more oil into the market would be given more time after EC turned down a unified effort.
Politicians are under a lot of heat and they would like to do anything they can to bring the price down, said John Vautrain, director at Purvin & Gertz energy consultants.
You don't know how long the Libya situation may last and releasing some crude might be beneficial, Vautrain said from Singapore, adding that it will manage to keep the price from blowing out, but they can only do it a few times. I don't think it will have as much impact as they would like.
The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve -- the same quality that markets have lost due to the Libya disruption. But doubts still prevail about whether that crude will make it to Europe, where it is needed the most.
Venezuela sees no long-term impact on oil prices from the IEA stockpile release, saying it was a political decision linked to elections in the United States and Europe. [ID:nN1E75M1PP]
In fact, the IEA release may prompt Saudi Arabia to pump less crude than it would have originally by the end of the year, according to Barclays Capital, tightening up balances into 2012.
The ultimate implications of the stock release are far greater and longer term, threatening to jeopardize consumer-producer relationships in the oil market and placing upward pressure on prices by year-end and into next year, said Barclays Capital analysts headed by Paul Horsnell.
Other analysts also mentioned the possibility that the replenishment of emergency stockpiles would tighten markets later in the year, but supplies are much higher than required by the IEA, so there is no impending need to refill tanks.
At 1.6 billion barrels, total emergency oil stockpiles held by IEA nations amount to the equivalent of 146 days of net imports, compared to the Agency's requirement of 90 days.
Total oil industry stocks held by OECD nations are much higher than in the previous release of emergency stockpiles, when the IEA also made available 60 million barrels in the wake of Hurrican Katrina in September 2005.
They were enough to cover the equivalent of 59 days of demand in April, compared to an average of 51 days in 2005, IEA data show. The IEA's first release came during the first Gulf War in 1991.
This move by the IEA, even if pointing to the loss of the Libyan barrels, is really about the use of emergency stocks for non-emergency purposes, i.e. to put a limit on the crude oil price upside, said Tilak Doshi, chief economist at the Energy Studies Institute of the National University of Singapore.
This changes market psychology, with the potential use of IEA emergency stocks becoming another variable in the market outlook, Doshi said.
Goldman Sachs, whose oil price forecasts are closely watched by markets, said the release of the IEA oil could knock down prices of Brent crude by $10 to $12 a barrel.
Oil markets were already down sharply on Thursday ahead of news of the release, due to worries over global fuel demand following higher-than-expected U.S. jobless claims, forecasts of lower U.S. growth from the Federal Reserve and evidence of a slowdown in Chinese manufacturing.
J.P. Morgan analysts led by Lawrence Eagles said the offer of strategic oil inventory should be seen not only as a stop-gap due to insufficient global supply, but also as an injection of stimulus into the world economy, and result in a significant shift in world oil pricing dynamics in the third quarter.
(Additional reporting by Luke Pachymuthu; Editing by Clarence Fernandez)