Oil may keep rising despite the biggest release of emergency stockpiles

The oil market this week sent a clear signal that the release of massively stockpiled crude oil by the United States and its allies is not enough to address the unprecedented supply disruption triggered by the Iran war.

More than 30 countries in Europe, North America and Northeast Asia have agreed to flood the market with 400 million barrels of oil in a bid to keep rising energy prices in check. The United States is leading this effort, releasing 172 million barrels from the Strategic Petroleum Reserve, or 43% of the IEA total.

This is the largest release of stockpiled oil in the 50-year history of the International Energy Agency, an agency tasked with protecting the energy security of its members during global crises.

However, the oil bazooka does not inspire confidence in the market. Crude oil prices have risen more than 17% since the IEA announced its emergency stockpile on Wednesday. Brent International benchmark oil prices closed above $100 for the second consecutive session on Friday.

The explanation is simple, said Tamas Varga, an analyst at London-based oil broker PVM. 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 chokepoint closed.

“Until transit is reactivated, the impact of such policy announcements will be limited,” 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 barrels per day could be exported through Saudi and UAE pipelines terminating in the Red Sea and Gulf of Oman, he said.

That leaves only about 9 million barrels per day, or about 10% of global supply, that can pass through the Bosphorus and will remain a bottleneck in the region until transit resumes, Liles said. At first glance, 400 million emergency barrels would cover about 40 days of this supply loss, the analyst said.

But the truth is much more complex, Liles said. “There is only a limited amount of volume that can be brought to market in a given period. It’s not like 400 million barrels will appear on the market right away,” he said.

Stocks are not enough

The war-disrupted oil supply far exceeds the stocks the IEA can release on a daily basis. Ultimately, the action will have a limited impact on the path of oil prices, analysts at Bernstein told clients in a note on Thursday.

The United States will extract 172 million barrels of oil over a 120-day period. This works out to 1.4 million barrels per day, just 15% of the supply lost due to the closure of Hormuz. It takes 13 days for the barrels to hit the market with President Donald Trump’s permission.

The IEA did not provide details on when other members would start releasing barrels and in what quantities. He said each of its 32 member countries would decide according to the circumstances appropriate to them.

The IEA most recently released emergency stockpiles in response to Russia’s invasion of Ukraine. According to consulting firm Rapidan Energy, its members managed to reach a high of 1.3 million barrels in total in September 2022. Perhaps the IEA could push the emissions rate closer to 2 million barrels per day, according to Rapidan.

“This buys time but does not solve the crisis,” Bernstein analysts said.

Liles said it was possible that oil prices could rise to levels that would begin to reduce demand before the release of inventories takes full effect. Rystad predicts a two-month war will push Brent oil prices to $110 a barrel by April. A four-month war could see Brent rise to $135 a barrel by June.

Risk of extinction

IEA members also face the risk of depleting their stocks. The 400 million barrels planned to be released represent 33% of the 1.2 billion barrels in member states’ stocks. The 172 million barrels that the US plans to release represent 41% of the 415 million barrels currently held in the Strategic Petroleum Reserve.

The White House plans to replace 200 million barrels of the oil it releases over the next year at no cost to taxpayers, U.S. Energy Secretary Chris Wright said Wednesday.

The IEA’s action also does nothing to address the 20% of liquefied natural gas exports that fail to reach the global market due to the Bosphorus closure. LNG is a type of natural gas that is liquefied, cooled and loaded onto tankers for export. Natural gas is used for electricity generation and heating purposes.

Stockpiles will partially cushion the oil shock from the war, said Tobin Marcus, head of U.S. politics and policy at Wolfe Research.

“But this in no way eliminates the need to reopen the Bosphorus, and we do not think there will be more aid coming from now on,” he said.