The International Energy Agency plan to release 400,000,000 barrels of oil reserves to the world is unprecedented and urgently needed to counter the devastating supply shock caused by the Iran War. But it will only offer limited relief so long as energy exports to the Middle East are blocked.

The IEA announced on Wednesday that all 32 of its member countries had unanimously?agreed? to begin the largest collective withdrawal ever?from strategic petroleum reserves. This is a more than two-fold increase in comparison to the previous, and largest coordinated drawdown, which took place after the Russian invasion of Ukraine. The U.S. released around 180 million barrels. The current global oil crisis is so severe that these volumes are at least as high as previous records. Since the Strait of Hormuz was effectively closed on February 28, the Gulf has been unable to supply nearly 20 million barrels of oil per day, or a fifth of world production. The announced release is less impressive when compared to the disruption caused by Israel-U.S. war against Iran on February 28. The current market deficit is already at 220 million barrels after only 11 days. Saudi Arabia and the United Arab Emirates are trying to divert some exports outside of the Gulf to provide additional relief. However, these flows remain vulnerable.

The length of the Iran conflict, and the continuing closure of the Strait of Hormuz is therefore crucial in determining if the release of oil can actually stabilise the markets or just slow down the damage.

Missing Details

Since its creation by OECD member countries in the mid-1970s, in response to 1973 OPEC embargo, the IEA only coordinated emergency stock releases four times. This crisis led to severe fuel shortages, and an increase of four times the price of oil.

The lack of frequency highlights the severity of the situation, but could also indicate the limitations of the tool deployed.

It is important to know the details before assessing the impact of this release.

The pace of the drawdown has not been determined. The IEA stated that its members would determine when they release their oil and, most importantly, how fast it will reach the market.

JPMorgan estimates that a coordinated release of SPR could occur at a maximum of 1.2 million barrels per day, based upon past precedents. The 2022 drawdown was equivalent to approximately 1 million bpd. The release at those rates would only offset a fraction of the current disruption in supply, leaving a market that is severely undersupplied.

The location of the oil release is almost as important as the amount. Asia has been the most affected by the current supply shock, as it relies heavily on oil imported from the Gulf. Refiners in the region have already begun to reduce their operating rates. Several countries have also started rationing fuel as a way to conserve diminishing stocks. Japan, the country with the second largest strategic reserve in the OECD has announced that it will begin releasing around 80 million barrels of oil from state and private inventories. This is equivalent to 45-days' supply. This should bring immediate relief to Japanese refiners. It is almost certain that the U.S. will be the biggest contributor to the release, even though it has not yet specified its role. The SPR of the United States is approximately 415 million barrels, stored in dozens salt caverns on the Gulf Coast. According to Energy Information Administration, this is less than 60% the total capacity of 713 million barrels.

However, for refiners in Asia the release of U.S. barrels may not be as helpful. The tanker trip from the Gulf Coast of the United States to Asia can take up to 60 days, depending on the route. This is more than twice the time it takes for shipments coming from the Middle East.

The delays will only be compounded with sharply increased freight costs. According to calculations, the recent increase in tanker prices 'due to conflict' adds $10 to $12 per barrel for a trip from the U.S. Gulf Coast up to Singapore. This is around 15% more than the value of the cargo.

A longer-term price is also involved. This release will deplete a large portion of the world’s emergency reserves. The nations that consume it may find themselves with less cushioning if the conflict continues or escalates.

SPR will provide the oil market with vital breathing room, as governments struggle to deal with inflation, economic slowdowns and social strain.

This historic intervention may quickly be reduced to a mere drop in the sea if energy supplies from the Middle East are not resumed.

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(source: Reuters)