The plan of the International Energy Agency to release 400,000,000 barrels of oil is unprecedented and urgently needed to counter the supply shock caused by the Iran War. 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 their Strategic Petroleum Reserves (SPR). This release is "more than twice as large" as the last - and largest - coordinated 'drawdown' in March 2022, following Russia’s 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 they were in March 2022, when the U.S. released 180 million barrels. 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 have been working to divert exports from the Gulf to other ports, which could provide additional relief. However, these flows are limited and vulnerable.

The length of the Iran conflict, and the continuing closure of the Strait of Hormuz is therefore critical in determining if the release will be able to stabilise the markets or simply slow down the damage.

Missing Details

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

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

The release has not yet been announced in full, but it is important to know the key details to assess its impact.

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

JPMorgan estimates a coordinated release of SPR?could be at a maximum flow rate of around 1.2 million Bpd based on previous 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 the market 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 release 80 million barrels of oil from state and private stocks, equivalent to 45 days' supply. This is expected to begin as early as 16 March. This should give Japanese refiners a quick, tangible boost. 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.

The release of U.S. barrels to refiners in Asia may not be as helpful. The tanker journey from the U.S. Gulf Coast takes between 40 and 60 days, depending on the route. This is more than twice the time it takes for shipments coming from the Middle East.

The cost of freight will also increase dramatically. According to calculations, the recent increase in tanker prices due to the conflict will add $10 to $12 to a barrel of cargo traveling from the U.S. Gulf Coast up to Singapore. This is an additional 15% to 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 and leave the consuming countries with a much thinner cushion if the conflict continues or escalates.

The release of the?SPR will provide the global oil markets with vital breathing room as governments struggle to deal with the threat posed by surging inflation, slowdown in the economy and social strain.

Even this historic intervention may quickly be reduced to a mere drop in the sea if energy flows from the Middle East are not resumed rapidly.

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(source: Reuters)