(March 11): The International Energy Agency (IEA) is proposing a discharge of emergency oil reserves that would be the largest in its history, as Japan said it’ll press ahead with its own release regardless.
The IEA, which co-ordinates stockpile discharges for OECD countries, has suggested member states release 400 million barrels, German Economy Minister Katherina Reiche said Wednesday. A decision is possible later in the day, a person familiar with the matter said, asking not to be identified discussing private deliberations.
Governments are seeking to contain a spike in energy prices driven by the Middle East war. Oil soared to almost US$120 ($152.80) a barrel in London on Monday as flows through the Persian Gulf’s critical Strait of Hormuz remained essentially halted, though futures have since eased significantly — in part on expectations that governments would tap their oil reserves.
A meeting of G7 leaders on Wednesday will discuss the stockpile release, French Finance Minister Roland Lescure said separately. The Group of Seven nations have said they support, in principle, “proactive measures” including the release of strategic reserves, but haven’t provided details on the scale of a potential intervention.
The Wall Street Journal earlier reported plans for a record stock deployment. The IEA didn’t respond to a request for comment.
See also: World races to shield oil flows after supplies hit by Iran war
Japanese Prime Minister Sanae Takaichi said the nation will release oil from its own strategic reserves, beginning as soon as March 16. Germany’s Reiche said her country expects to release part of its reserves if the IEA’s proposal is accepted.
IEA proposal
The pace, duration and location of any fuel release will be key for energy markets.
See also: Global LNG hunt intensifies as Middle East war cuts supply
The move under consideration would exceed the 182.7 million barrels that IEA members ultimately put into the market in 2022 after Russia invaded Ukraine. That action, formally approved by the ministers of member states at a meeting of the agency’s governing board in March of that year, equated to a release of two million barrels a day in its initial month, and was subsequently extended and supplemented.
But potential supply losses from this crisis may be much bigger than in 2022.
While global oil markets had been in surplus at the start of this year, that picture has been upended by the effective closure of the Strait of Hormuz, through which about 20% of the world’s seaborne oil normally flows.
With storage tanks in the region filling up, major producers including Saudi Arabia, the United Arab Emirates and Iraq are deepening supply cuts, shaving about 6% off global output. The UAE also halted operations at its biggest refinery, Ruwais, on Tuesday as a precaution after a drone strike in the area.
Volumes in stock
The IEA has said its 32 members hold more than 1.2 billion barrels in public emergency stockpiles, including the largest buffer, the US Strategic Petroleum Reserve. There’s a further 600 million barrels of industry stocks under government obligation.
These countries are obligated to hold at least 90 days of net oil imports, which can consist of stockpiles maintained exclusively for emergency use or inventories held for commercial purposes, as well as stocks stored under bilateral agreements.
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The US Strategic Petroleum Reserve, or SPR, currently contains about 415 million barrels of oil, or a little more than half its capacity. Established in the 1970s following the Arab oil embargo, the inventory is contained in massive and deep underground caverns at four heavily guarded sites along the Gulf of Mexico.
Oil futures fell Wednesday in early Asian trading on reports of the stockpile-release plans, then ticked back up.
Some traders and analysts doubt that consumer governments will be able to tap inventories quickly enough to fill the yawning supply gap.
“The devil is in the details,” said Homayoun Falakshahi, a senior analyst at intelligence firm Kpler Ltd. “The key question is how quick they will release this.”
Daily flow
JPMorgan Chase & Co said that a deployment of as much as 400 million barrels would translate to a “feasible” daily flow of just 1.2 million barrels a day, and “not offset potential losses”.
The US “would likely supply the largest share of any release”, Natasha Kaneva, the bank’s head of commodity markets strategy, said in a note on Tuesday.
Even if the US SPR’s maximum drawdown rate is coupled with flows from other IEA members, it might cover just a portion of the 11 million-to-16 million barrels of supply from the Persian Gulf that Citigroup Inc estimates is being lost each day.
The maximum drawdown capability of the US SPR is 4.4 million barrels a day, according to the Energy Department’s website, and it takes 13 days for SPR oil to reach the open market after a presidential decision.
The IEA has previously helped implement five such interventions: in the buildup to the 1991 Gulf War, after hurricanes Rita and Katrina in 2005, following the outbreak of civil war in Libya in 2011, and twice in 2022 in response to disruptions connected to the war in Ukraine.
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