IEA record reserve release, markets doubt relief
A pump jack is seen at sunrise on October 14, 2014 near Bakersfield, California.
Lucy Nicholson | Reuters
Oil prices rose more than 8% on Thursday, with Brent crude hitting $100 a barrel, as traders remained unconvinced that releasing government stockpiles could offset the massive supply shock triggered by war in the Middle East.
West Texas Intermediate rose 8.8% to $95 a barrel, while global benchmark Brent traded around $100 a barrel, up nearly 8.88%, even after the International Energy Agency announced it would urgently release the largest crude oil reserves in history.
The IEA said on Wednesday that its 32 member countries would release 400 million barrels of oil from emergency reserves, marking the largest coordinated drawdown since the agency was established in the wake of the 1973 oil embargo.
The U.S. has announced it will extract 172 million barrels of oil from its Strategic Petroleum Reserve, and Energy Secretary Chris Wright said shipments could begin next week and take about 120 days to complete.
The IEA’s decision also highlights how serious the risk of oil shortages is and shows that the IEA does not believe the war is likely to end any time soon.
The oil market shrugged off these announcements as prices continued to rise, highlighting traders’ doubts that the measures could close the supply gap if flows through the Strait of Hormuz were disrupted.
“Prices are still in panic mode right now. The prices we’re seeing are dominated by a lot of emotion, fear and uncertainty,” said Pavel Molchanov, senior investment strategist at Raymond James.
MST Marquee energy analyst Saul Kavonic said the IEA’s record strategic stock announcement would add some much-needed volumes to the market, although it would only cover a quarter of the 20 million barrel-per-day supply gap created by the closure of the Strait of Hormuz.
“But the IEA’s decision also highlights how serious the risk of oil shortages is and shows that the IEA does not believe the war is continuing.” [likely] “It will end soon and stock draws will need to be replaced later, which points to higher prices even after the war is over,” he told CNBC.
About one-fifth of global oil supply passes through the Strait of Hormuz, which connects the Persian Gulf to global markets.
Timing and logistics remain uncertain
Industry doyens said one of the main reasons markets remain nervous is uncertainty about how quickly barrels will reach the market.
While the IEA’s announcement marked an unprecedented intervention, the agency did not provide details on how quickly countries would release their reserves or how the oil would be distributed.
“This is one of the important questions about how long it will take to physically bring 400 million barrels to the market,” Molchanov said.
Oil prices since the beginning of the year
“Four hundred million is a big number… but this is the biggest oil supply disruption since at least the 1970s, so we need a lot of oil and we need it fast,” he said.
Strategic stocks are held separately by each IEA member country, meaning technical and logistical constraints could slow the flow of barrels.
Molchanov estimates it could take 60 to 90 days for oil to reach the market in a meaningful way; That’s longer than traders had hoped for immediate relief.
