Plans to release hundreds of millions of barrels of crude from emergency stockpiles are unlikely to calm volatile crude prices for long if the conflict in the Gulf continues, oil market watchers have warned.
Finance ministers from the G7 said on Monday they were ready to “take necessary measures” and that talks would continue on releasing oil from stockpiles, as they work to respond to a crisis that has cut the flow of oil and refined products through the Strait of Hormuz, at the mouth of the Gulf, by as much as 20mn barrels a day.
Will releasing stockpiles bring down the oil price?
Oil prices reacted on Monday to an FT report that the G7 was discussing a strategic release, with benchmark Brent crude falling from a high of $119 a barrel to below $90.
There have only been five releases of strategic stockpiles in history, starting with the first Gulf war of 1990-91 and culminating most recently with a release after Russia invaded Ukraine in 2022. However, none of the releases has been on a scale that would make a dent in the current crisis.
Martijn Rats, global oil strategist at Morgan Stanley, said the evidence was “distinctly mixed” about whether releasing government reserves helps to bring down prices.
“Quite often they continue to go up, because a release signals the severity of the moment, that we are in heightened stress,” he said.
Releasing strategic reserves also does not necessarily change market behaviour, since buyers are likely to continue to bid up prices to secure whatever flows of crude they can lay their hands on rather than relying on the limited stores of crude that governments hold.
“It is very, very difficult to replace flows with stocks,” said Paul Horsnell at the Oxford Institute for Energy Studies. “Markets are never happy about that.”
Is there enough oil in reserve to fix the problem?
Members of the International Energy Agency (IEA) collectively hold about 1.2bn barrels of public emergency stocks, alongside a far greater quantity of industry stocks that can be mobilised to smooth out the market.
The IEA mandates its members to hold 90 days’ worth of reserves against any supply disruption. Countries are allowed to count stocks being held by oil companies and traders.
According to the IEA, governments in OECD countries held just over 900mn barrels of crude and roughly 300mn barrels of refined products such as gasoline and diesel in state-controlled stocks at the end of last year.
A further 2.8bn barrels of oil and refined products were held by members of the industry such as oil companies, traders and refineries, 600mn barrels of which are technically under government control.
A portion of these counted reserves may be part of normal commercial operations, Horsnell noted, such as the oil passing through pipelines. “You cannot let all of it go because otherwise you have a system with nothing in it,” he said.
Countries also have significant flexibility about how they count their reserves. The UK and Greece, for example, do not have a single day’s worth of government-controlled reserves, preferring to rely on commercial stocks.
Commercial stocks form the first line of defence when markets tighten, as companies try to manage their supply chains, with governments only resorting to releasing strategic reserves when absolutely necessary.
The IEA also thinks a further 2bn barrels of crude are currently on board tankers at sea, a significant share of which is Russian, Iranian or Venezuelan crude that could be released to buyers if countries modify their sanctions.
How soon the reserves could be released and at what pace is unclear.
In the past, strategic reserves have been released through auctions to major oil companies and traders, who then moved the oil to refineries that needed it, while refineries in Europe were allowed by their governments to reduce the amount of gasoline and diesel they held in reserve and let more of it flow through to the market.
“The maximum we have ever seen is 1.3mn barrels a day across all the IEA countries combined,” said Rats. “Theoretically, they might be able to do 3mn to 3.5mn b/d but that has never been done before.”
This pales against the disruption the Iran conflict has already caused. Roughly 20mn b/d of crude oil and refined products flows through the Strait of Hormuz in normal times.
“This is the largest oil shock in history in terms of immediate impact,” said Horsnell, adding that the scale of the problem far outweighs any possible release from strategic reserves.
“This is the production outage that all analysts and all strategists were war gaming constantly through the 70s, 80s and 90s. It seems no one has done that for the last 30 years.”
Should the G7 release oil from the reserves?
Before it decides on releasing reserves, the IEA assesses the scale of the disruption and whether oil stocks can be made up by more production elsewhere. It also consults with industry on how it is coping. The agency also states that emergency releases of oil are “not a tool for price intervention”.
So far, politicians in the US and EU have been relatively relaxed about supply disruptions. Oil market watchers are less sanguine.
“Last week, we saw jet fuel tankers turning around in the middle of the ocean and sailing back to Asia,” said Rats, who pointed out that Europe would suffer shortages of jet fuel “within weeks” if the situation continues.
“This is by now the largest supply shock in the history of the oil market, nearly double the Suez crisis, which was 10 per cent of global supply,” he said, adding that he saw issues in Asia and the US, as well as in Europe.
Asia is likely to bear the brunt of the current crisis because it imports most of its crude from the Middle East and governments have already started to respond by rationing energy and banning exports of refined products.
“Everyone is going to face a challenge,” said Kitt Haines, who monitors oil inventories at Energy Aspects. “I don’t think any scenario has ever planned for this kind of disruption. Asia is disproportionately impacted because they take the largest volumes of crude from the Middle East.”
Is China releasing its reserves?
China, the world’s largest crude importer, has so far given no indication that it plans to release oil from its own strategic reserve, which analysts estimate covers more than 120 days of imports.
Instead, Chinese buyers appear to be continuing to source crude on international markets.
“If you can secure a flow then you continue with that flow,” Horsnell said. “They are not going to make the calculation that they can stop importing because they can run down their strategic reserve. That is not why they built it.”
Data visualisation by Jana Tauschinski