The Paris-based International Energy Agency (IEA) announced yesterday that it would not continue releasing oil reserves into the global oil market.

The decision last month to release 60 million barrels from member strategic reserves, with 30 million coming from the U.S. Strategic Petroleum Reserves (SPR), did have an initial downward impact on oil prices.

But that turned out to be short-lived.

On June 22, when the surprise announcement was made, West Texas Intermediate (WTI) benchmark crude closed at $94.425 in New York, while Brent crude in London ended at $113.77.

At market open Friday, WTI stood at $99.175, and Brent was up to $117.80.

Thus ends a one-month experiment that has been largely a failure.

The IEA Was Testing Its Ability to Combat Looming Problems

As I have noted previously, the additional supply from the IEA/SPR move, combined with the 500,000 additional barrels a day poured in by the Saudis, would be met (and possibly exceeded) by expected rises in global demand by the end of the year. (See "The Oil Supply Constriction is Fast Approaching," July 18; and "Releasing the Strategic Petroleum Reserve Will Make Volatility Surge," June 24.)

So this was hardly an attempt to "balance the market."

Rather, I suggest that the 60 million barrels (about 16 hours of global supply needs) were an initial attempt to meet the future constriction in oil supply likely to emerge by the end of this quarter.

It was not, therefore, an attempt by the IEA to address the current pricing problem (for which it was too small and too late), but to test its own ability to lessen an upcoming one.

But we knew quickly that this was hardly a supply-end problem when neither the IEA nor Washington could find buyers for the entire 60 million.

Soon thereafter, the other shoe I talked about began to fall.

Declining Prices Only Bolster Demand

To have any real effect, both the IEA and the U.S. would need to both continue and increase monthly allotments of crude. Even then, the market was showing a strong ability to absorb the additional volume.

Remember, any prospect that prices will be leveling off or declining tends to add additional demand expectations.

The IEA/SPR decision, therefore, carried within it the undermining of its very objective.

In addition, Washington was becoming unnerved by the additional element of having to purchase replacement barrels for the SPR – at full market price – if the releases were to continue for very long. That would prompt market trading to view the government transactions with oil companies as the basis for pricing… rather than the dynamics of the general global trade itself.

Government action would be setting price, not the market. Hardly the end result wanted by either party inside the Beltway, especially leading into an election year.

The IEA said yesterday it would be reviewing the situation and could intervene again at a later date.

Meanwhile, the U.S. government could always decide to continue releasing reserves on its own.

Yet a unilateral action by the U.S., without the de facto international endorsement conveyed by IEA involvement, would be unlikely. It would mean that parallel actions by Saudi Arabia (releasing additional production) and the U.S. (releasing additional reserves) could be construed as an attempt to manipulate the market price.

And nobody in D.C. policy circles – at least nobody I know – wants that alliance to make up the national approach. It's too much of a public relations snafu for an administration touting a renewed interest in domestic energy security…

What's Next for Crude Prices

So, with this little failed experiment out of the way (at least in the short term), does it mean that crude prices will now accelerate? Not necessarily.

After all, the IEA/SPR release did nothing to reduce overall prices, anyway.

Debates are beginning about how fast demand will continue to rise globally, and that level ultimately determines how far prices will go between now and the end of 2011. The spot shortages likely to start appearing by mid-September are a result of market difficulties that will not become chronic, but they will increase prices.

Again, though, this is not "peak oil." There is plenty of oil left (although this oil is more expensive to extract, process, and refine).

Instead, it's a combination of two factors:

1. The loss of forward drilling time as we move through the latter stages of the credit crunch, and
2. The unanticipated spike in demand in certain regions of the world.

So no Armageddon yet…

We are likely to continue seeing a range of pricing, about $90 to $105 in New York and $110 to $120 in London.

Of course, unexpected demand surges, geopolitical events, a further decline in the value of the dollar, and other factors may stimulate those pricing trends.

The opportunity here is the same one I have emphasized from the very beginning of Oil & Energy Investor: volatility.

All this is much less about price than it is about volatility. And the cycles of instability are becoming more pronounced. More of the movement is now contained within shorter periods of change, with relative "stability" in between. The cycles are becoming more extreme and more frequent.

The greatest profit-generator remains how we place ourselves on the volatility curve. Not whether some guys in Paris decide, now and then, to distort the market.