Oil price drops on reserve sale

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Last Updated at 28 Jul 2014, 11:00 ET *Chart shows local time Brent Crude Oil Future intraday chart
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The price of oil has fallen after the International Energy Agency said that its members will sell some of their reserves on the world market.

Brent crude ended Thursday trading down $6.95 to $107.26, a four-month low. US light crude fell by $4.39 to settle at $91.02.

The IEA says the move is in response to the disruption in supplies caused by the Libyan conflict.

It plans to release an extra 60 million barrels of oil on to the world market.

The US government has announced that 30m barrels, half of the total, will be released from its Strategic Petroleum Reserve.

The UK plans to contribute three million barrels.

"Events in the Middle East and North Africa have disrupted supply and contributed to the price spike. So we've been working closely with our international partners to take action," said UK chancellor George Osborne.

It is only the third time the IEA has asked its member nations - who are mostly oil importers - to release some of their spare supply.

The release of reserves temporarily increases global oil supply by around 2.2%.

The agency estimates that the Libya conflict removed 132m barrels of oil from the market up until the end of May.

Start Quote

The long term impact on prices could actually be much worse”

End Quote Amrita Sen Barclays Capital

There were concerns that a seasonal increase in demand for oil - coinciding with the US "driving season" - would cause prices to rise further.

Economic worries

The release is also designed to reduce the price of oil further in order to protect the economy.

"I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy," said IEA executive director Nobuo Tanaka.

The IEA had warned high oil prices would cause a slowdown in the world economy.

Oil prices had already fallen on Thursday after lower US growth forecasts and worries about an economic slowdown in China concerned investors.

"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," said John Kilduff a partner at Again Capital LLC.

Opec reaction
An oil well Oil production has fallen due to the Libya conflict

The moves follows an unexpected decision by Opec to hold oil production steady at the cartel's last meeting earlier in June.

The IEA had called on Opec to increase output to meet demand and lower prices.

But despite the failure to raise production at the meeting, some countries, such as Saudi Arabia, had already said they would increase production to meet IEA concerns.

Analysts have warned there is a risk the IEA's latest move may hurt relations with major oil exporters.

"Saudi had come out and said it would be increasing production to meet demand, and consumer governments are over-riding that with short-term reserve increases," said Amrita Sen an oil analyst at Barclays capital.

"The long-term impact on prices could actually be much worse," she added.

The Paris-based agency says it consulted with both producer and consumer countries before making the decision.

IEA members must hold sufficient stocks of oil to last 90 days without any imports - currently the IEA says its members are holding enough for 146 days or 4.1 billion barrels.

They have agreed to make two million barrels of this available every day for 30 days, increasing supply on the market and so reducing the price.

The IEA says it will review the market again in 30 days time.

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