This week, the oil market made a very good statement that the enormous stockpile of crude by the U.S. and its allies will not even come to the rescue of the massively unprecedented supply disruption caused by the Iran war.
Over 30 countries in Europe, North America, and Northeast Asia settled on saturating the market with 400 million barrels of oil in a move aimed at holding down the swelling energy prices.
The U.S. is spearheading the move with the release of 172 million barrels from its Strategic Petroleum Reserve, or 43 percent of the IEA total.
It is the biggest release of stockpiled oil in the 50-year history of the International Energy Agency, which is an organization established to sustain the energy security of its members in the event of a global crisis.
However, the oil bazooka is not instilling confidence in the market. The crude prices have escalated by over 17 percent since the IEA announced the emergency stockpile release on Wednesday. International benchmark, the Brent oil prices, closed above $100 on Friday, in the second consecutive session.
The explanation is simple, said Tamas Varga, analyst at the London-based oil broker PVM. In the Persian Gulf, tankers are being attacked, the important Strait of Hormuz is virtually being closed, and the new supreme leader of Iran has threatened to keep the trade choke point closed.
Tom Liles, Senior Vice President of Upstream Research at Consulting Firm Rystad Energy, said, “Until transit is reactivated, those kinds of policy announcements are going to have limited impact.”
Liles stated that Saudi Arabia, Iraq, Kuwait, and the United Arab Emirates exported around 14 million barrels per day (bpd) before the war.
He added that approximately 5 million bpd to 6 million bpd can be exported through Saudi and UAE pipelines that terminate at the Red Sea and Gulf of Oman.
Liles reported that this would leave behind about 9 million bpd or 10 percent of the world’s supply that can only be transported via the Strait and will continue to be bottlenecked in the region until transit returns.
The analyst stated that on the surface, the 400 million emergency barrels would run to approximately 40 days of that lost supply.
Liles stated that the truth of the matter is much more complex. He said, “There’s only a limited amount of volume that can be released over a given period. It’s not as if 400 million barrels just appear immediately on the market.”
The disruption of oil supply caused by the war is so immense compared to the reserves that the IEA can dispatch daily. Analysts at Bernstein told clients in a Thursday note that the outcome of this move will be a minimal effect on the direction of oil prices.
The U.S. will issue 172 million barrels within a 120 day-period. This means 1.4 million barrels per day, which is only 15 percent of the amount lost when Hormuz is closed. The barrels take 13 days to reach the market after President Donald Trump gave his approval.
The IEA failed to specify when the remaining members would commence to release barrels and in what quantities. It added that every one of its 32 member states will make its own decisions depending on situations that suit them.
The last emergency stockpiles to be released by the IEA were due to the invasion of Ukraine by Russia. According to consulting firm Rapidan Energy, its members recorded a joint high of 1.3 million bpd in September 2022. Rapidan reported that the IEA might increase the rate of release up to 2 million bpd.
The Bernstein analysts said, “It buys time, but it does not solve the crisis.”
Liles stated that there is a possibility that the oil price will escalate to a stage where it begins to decrease demand before even the entire stockpile release takes effect. Rystad predicts that a two-month war will drive the Brent oil prices to above $110 per barrel in April. The four-month war might take Brent to $135 per barrel in June.
The IEA members are also at risk of draining their stockpiles. The 400 million barrels to be released will be 33 percent of the 1.2 billion barrels in member-state inventory. The release of 172 million barrels by the U.S. is 41 percent of the 415 million currently in the Strategic Petroleum Reserve.
U.S. Energy Secretary Chris Wright declared Wednesday that the White House intends to exceed the amount of oil it is emitting by 200 million barrels over the next year at no expense to the taxpayer.
The IEA move also fails to solve the 20 percent of liquefied natural gas exports that cannot find their way into the global market because of the closure of the Strait.
LNG is a mixture of natural gas that has been chilled into a liquid and is loaded onto tankers to be exported. Natural gas is used for electricity production and heating.
Tobin Marcus, Head of U.S. Policy and Politics at Wolfe Research, stated that stockpiles will partially alleviate the oil shock from the war.
He said, “But it does not by any means obviate the need to reopen the Strait, and we don’t think much more help is coming after this.”
