The oil market sent a clear signal this week that a massive release of stored crude by the United States and its allies is not enough to address the unprecedented supply disruption caused by the Iran war.
More than 30 countries in Europe, North America and Northeast Asia agreed to flood the market with 400 million barrels of oil in an effort to control rising energy prices. The United States is leading the effort with a release of 172 million barrels from its Strategic Petroleum Reserve or 43% of the IEA total.
It is the largest release of stored oil in the 50-year history of the International Energy Agency, an organization charged with maintaining the energy security of its members during global crises.
But the oil bazooka does not inspire confidence in the market. Crude oil prices have risen more than 17% since the IEA announced the emergency release of reserves on Wednesday. Brent Oil prices, the international benchmark, closed above $100 on Friday for the second straight session.
Brent crude oil futures in the last five days
The explanation is simple, said Tamas Varga, an analyst at London-based oil brokerage PVM. Oil tankers are under attack in the Persian Gulf, the critical Strait of Hormuz remains essentially closed and Iran’s new supreme leader has vowed to keep the trade bottleneck closed.
“Until transit resumes, those types of policy announcements will have limited impact,” said Tom Liles, senior vice president of upstream research at consulting firm Rystad Energy.
Saudi Arabia, Iraq, Kuwait and the United Arab Emirates exported about 14 million barrels per day (bpd) before the war, Liles said. About 5 to 6 million bpd can be exported through Saudi and UAE pipelines ending in the Red Sea and Gulf of Oman, he said.
This leaves about 9 million bpd, or about 10% of global supply, that can only pass through the Strait and will remain stuck in the region until transit resumes, Liles said. At first glance, the 400 million emergency barrels would cover about 40 days of that lost supply, the analyst said.
But the reality is much more complicated, Liles said. “There is only a limited amount of volume that can be released over a given period. It’s not like 400 million barrels will immediately appear on the market,” he said.
Reserves are not enough
The oil supply interrupted by the war is much greater than the reserves that the IEA can publish daily. As a result, the action will have a limited impact on the trajectory of oil prices, Bernstein analysts told clients in a Thursday note.
The United States will release 172 million barrels over a period of 120 days. This implies 1.4 million barrels per day, which is only 15% of the supply lost due to the closure of Hormuz. It takes 13 days for barrels to reach the market since President Donald Trump’s authorization.
The IEA did not detail when other members would begin releasing barrels or in what quantities. It said each of its 32 member countries will decide based on the circumstances appropriate to them.
The IEA last released emergency stockpiles in response to the Russian invasion of Ukraine. Its members managed to reach a combined maximum of 1.3 million bpd in September 2022, according to consultancy Rapidan Energy. According to Rapidan, the IEA could perhaps increase the release rate to around 2 million bpd.
“This buys time, but it does not solve the crisis,” Bernstein analysts said.
Oil prices may rise to levels that begin to reduce demand before the release of reserves takes effect, Liles said. Rystad predicts that a two-month war will push Brent oil prices to $110 a barrel in April. A four-month war could send Brent to $135 a barrel in June.
Risk of burnout
IEA members also risk depleting their reserves. The 400 million barrels scheduled for release represent 33% of the 1.2 billion barrels in Member States’ reserves. The 172 million barrels that the United States plans to release represent 41% of the 415 million barrels currently held by the Strategic Petroleum Reserve.
U.S. Energy Secretary Chris Wright said Wednesday that the White House plans to more than replace the oil it is releasing with 200 million barrels over the next year at no cost to the taxpayer.
The IEA action also does nothing to address the 20% of liquefied natural gas exports that cannot reach the global market due to the closure of the Strait. LNG is a form of natural gas that is cooled into a liquid and loaded into tanker trucks for export. Natural gas is used for the production of electricity and heating.
The reserves will partially alleviate the oil impact of the war, said Tobin Marcus, head of U.S. policy at Wolfe Research.
“But it in no way eliminates the need to reopen the Strait, and we don’t think there will be much more help coming after this,” he said.
