The oil market sent a clear signal this week: A massive release of stored crude by the United States and its allies is far from enough to address the unprecedented supply disruption triggered by the war in Iran.
More than 30 countries in Europe, North America and Northeast Asia have agreed to flood the market with 400 million of barrels of oil in order to contain the rise in energy prices. The United States is leading the effort with the publication of 172 million barrels of its strategic oil reserve, or 43% of the IEA total.
It is the largest release of oil stocks 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 prices have jumped more than 17% since the IEA announced the release of emergency stocks on Wednesday. Brent oil prices, the international benchmark, closed above $100 Friday for the second consecutive session.
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Brent Crude Oil Futures Over the Last Five Days
The explanation is simple, believes Tamas Varga, analyst at the London oil broker PVM. Oil tankers are attacked in the Persian Gulf, the critical Strait of Hormuz remains virtually closed, and new supreme leader pledged to keep the trade chokepoint closed.
“Until mass transit is reactivated, these kinds of policy announcements will have limited impact,” said Tom Liles, senior vice president of upstream research at consultancy 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 5-6 million b/d can be exported via Saudi and Emirati pipelines that terminate at the Red Sea and Gulf of Oman, he said.
That leaves about 9 million bpd, or about 10% of global supply, that can only pass through the strait and will remain bottlenecked in the region until transit resumes, Liles said. At first glance, the emergency 400 million barrels would cover about 40 days of this loss of supply, the analyst said.
But the reality is much more complicated, Liles said. “There is only a limited volume that can be released in a given period. It’s not like 400 million barrels appear on the market immediately,” he said.
Stocks are not enoughThe oil supply disrupted by the war is far greater than the stocks the IEA can release daily. As a result, the move will have a limited impact on the trajectory of oil prices, Bernstein analysts told clients in a note published Thursday.
The United States will release 172 million barrels over a 120-day period. This implies 1.4 million barrels per day, or only 15% of the supply lost due to the Hormuz closure. It takes 13 days for barrels to hit the market from President Donald Trump’s authorization.
The IEA did not say when other members would start releasing barrels or in what quantities. He said each of its 32 member countries would decide based on circumstances that suit them.
The IEA last released emergency stocks in response to Russia’s invasion of Ukraine. Its members managed to reach a cumulative peak of 1.3 million bpd in September 2022, according to consultancy Rapidan Energy. The IEA could perhaps increase the rejection rate to more than 2 million bpd, according to Rapidan.
“This buys time, but it does not resolve the crisis,” Bernstein analysts said.
It’s possible that oil prices could reach levels that would begin to depress demand even before the inventory release fully begins, Liles said. Rystad predicts a two-month war will push Brent oil prices to $110 a barrel by April. A four-month war could push Brent to $135 a barrel by June.
Risk of burnoutAIE members are also at risk of depleting their stocks. The 400 million barrels planned for release represent 33% of the 1.2 billion barrels present in Member States’ stocks. The 172 million barrels that the United States plans to release represent 41% of the 415 million currently held in the strategic oil reserve.
U.S. Energy Secretary Chris Wright said Wednesday that the White House plans to do more than replace the oil it releases with 200 million barrels over the next year, at no cost to the taxpayer.
The IEA’s action also does nothing to respond to the 20% of liquefied natural gas exports which cannot access the global market due to the closure of the strait. LNG is a form of natural gas that is cooled into liquid form and loaded onto tankers for export. Natural gas is used for electricity generation and heating.
Stockpiles will partly ease the war-induced oil shock, said Tobin Marcus, head of U.S. policy at Wolfe Research.
“But that in no way obviates the need to reopen the strait, and we don’t think much additional help will come after that,” he said.
