Why Releases of Historic Oil Reserves Reduce Rising Prices | US-Israel war over Iran news

Global oil prices continue to rise despite the International Energy Agency (IEA) announcing the largest emergency reserves release in history.

Brent crude futures, the international benchmark, rose nearly 15 percent after the Paris-based IEA on Wednesday announced plans to release 400 million barrels to stabilize prices amid fallout from Israel’s war with the United States and Iran.

Oil prices were around $100 a barrel by 02:00 GMT on Thursday, up more than 35 percent from before the start of the war.

While the IEA’s release may provide some relief in the short term, market analysts say it will have minimal impact on lowering prices if the Strait of Hormuz is effectively closed.

“It’s not a silver bullet to solve everything. You have to solve the underlying problem,” Maksim Sonin, an energy executive at Stanford University’s Center for Future Fuels, told Al Jazeera.

“Markets trade on expectations, and so far they’ve been on the concerned side,” Sonin said.

Traffic through the strait, which borders Iran, Oman and the United Arab Emirates, has been effectively shut down amid Tehran’s threats against shipping in the region, blocking a fifth of global oil supplies.

Iran’s Islamic Revolutionary Guard Corps (IRGC) said on Wednesday that it would not allow “even a liter of oil” through the waterway, and the world should expect oil to rise to $200 a barrel.

At least five commercial ships, including two oil tankers, were attacked in the Iraqi port of Al-Faw on Wednesday.

US President Donald Trump has given mixed messages about how long the war against Iran could last, saying it will end “very soon” and that US forces have not yet “won enough”.

‘temporary solution’

Oil prices have been on a roller coaster ride in recent days amid fears of prolonged turmoil in the global energy sector.

Brent crude rose to $119 on Monday, before falling below $80, after US Energy Secretary Chris Wright falsely claimed that the US Navy had moved an oil tanker through the strait.

While the IEA’s release of strategic reserves is within historic limits, it seeks to temporarily plug a huge — and rapidly growing — deficit.

About 20 million barrels of oil pass through the strait each day under normal circumstances.

After 12 days of war, the global deficit has already exceeded 200 million barrels – more than half of the IEA’s projected release.

“If this continues, the release will only buy a temporary solution,” Gregor Seminyuk, a professor of public policy and economics at the University of Massachusetts Amherst, told Al Jazeera.

“I mean the release is already priced – why prices fell to 80 after rising to around $120 a barrel,” said Semieniuk.

“Furthermore, once it’s released, part of the firepower is gone and continued deterrence is even more of a threat,” he said.

“So market expectations are that if the release of reserves cannot cover all the shortfall, it will do little to check prices higher than they have already done,” he said.

There are restrictions on how quickly the IEA’s 32 member countries can get fresh supplies to market.

Based on past precedent, JP Morgan estimates that IEA member countries would be able to increase their output by 1.2 million barrels per day – a fraction of the daily volume moved through the Strait.

In its announcement on Wednesday, the IEA did not provide an exact timeline for the release, saying it would provide more details in due course.

The IEA coordinates the release of international reserves totaling 1.8 billion barrels, reserves held and managed by individual member states.

The U.S. Energy Department said Wednesday it would release part of its reserves — a total of 172 million barrels — starting next week. Japanese Prime Minister Sane Takaichi said his government would begin releasing 80 million barrels as early as Monday.

‘History shows prices can rise sharply again’

“The strategic reserve of around 400 million barrels being discussed should convince traders that supply can meet demand in the near term, which will calm prices for a while,” Chad Norville, president of industry publication Rigzone, told Al Jazeera.

“But if the disruption continues and the market begins to doubt that replacement supply will be sufficient, history shows that prices can rise sharply again.”

The IEA has combined reserve releases on five previous occasions with varying results.

After the IEA announced plans to release 60 million barrels shortly after Russia’s 2022 invasion of Ukraine, oil prices immediately jumped nearly 20 percent to $113 a barrel, though prices gradually eased in the months ahead.

The IEA’s efforts to boost supply in the run-up to the 1991 Gulf War, by contrast, were widely credited with bringing immediate stability to the market, with prices falling by nearly a third the day after the US launched airstrikes on Iraq.

Seminyuk, a professor at the University of Massachusetts Amherst, said prices are expected to rise dramatically if the effective closure of the strait extends into next week.

“Unless the conflict ends this week, after the effects of strategic buffer stocks wear out, I would not be surprised to see oil prices eventually cross $150 a barrel,” he said.

“I can’t predict how high oil prices will go, but using envelope calculations, a 20 percent supply cut could in principle lead to more than $200 per barrel as demand competes for limited supply,” he said.