IEA to Release Record 400MM Barrels From Oil Reserves

The International Energy Agency agreed to discharge 400 million barrels from emergency oil reserves, its largest-ever release, as governments seek to contain a price spike driven by the Middle East war.

The volume far exceeds the 183 million barrels that member states released in 2022 after Russia invaded Ukraine. But potential supply losses from the current crisis may also be much larger, with the near-halt of flows through the critical Strait of Hormuz keeping vast amounts of crude and fuels off the global market.

“The oil-market challenges we are facing are unprecedented in scale,” IEA Executive Director Fatih Birol said Wednesday in a statement. “IEA member countries have responded with an emergency collective action of unprecedented size.”

The decision was unanimous, Birol said, without specifying the pace, duration and location of the planned releases — details that are key for energy markets. French President Emmanuel Macron subsequently said the discharges will be organized in the coming days, and several nations have now outlined their contribution.

Heavy importer Japan, one of the countries most exposed to oil-price shocks, said it would release about 80 million barrels. The UK will contribute 13.5 million barrels, Germany about 19.5 million and France as much as 14.5 million. South Korea plans to release 22.5 million barrels.

Oil soared to almost $120 a barrel in London earlier this week as flows through Hormuz remained essentially halted, though futures have since eased — in part on expectations that governments would tap their oil reserves. Prices dipped following Wednesday’s announcement, before ticking back up.

Birol said the most important thing for the stability of energy markets remains the resumption of transit via the waterway, through which about 20% of the world’s seaborne oil normally flows.

Crude/Products Split

The IEA, which co-ordinates stockpile releases for OECD countries, has yet to give a breakdown of the types of oil included in Wednesday’s agreement — a detail important for energy traders looking to better understand the implications for different fuel and crude markets.

The last time the IEA coordinated a stock release, shortly after Russia’s invasion of Ukraine, the overall split was 73% crude and 27% products, with diesel-type fuels making up the single biggest chunk of the latter. The US was the top contributor, with 90.6 million barrels, all of which was crude oil.

Speaking privately, traders and analysts at large commodity trading houses and hedge funds have given a range of estimates for the rate at which barrels may hit the market this time around, largely between 2 million and 4 million barrels a day, though some put the figure lower at 1.2 million a day.

All agreed there was a large amount of uncertainty around the figures and that it would also depend on the split between crude and refined products.

Output Cuts

The effective closure of the Strait of Hormuz has caused storage tanks in Persian Gulf countries to fill up. As a result, major producers including Saudi Arabia, the United Arab Emirates and Iraq are deepening supply cuts, shaving about 6% off global output.

Asian importers take a much bigger share of the crude and oil products that normally flow through Hormuz than Europe or the US, suggesting the immediate impact of the Iran war should — overall — be much sharper in that region.

But that geographical split isn’t uniform across the barrel. Europe’s jet fuel market, for instance, is in dire need of supply. The fuel’s premium to crude has shot up since the conflict began, standing at almost $90 a barrel on Tuesday, according to figures from General Index. A similar measure for Asia is now significantly lower.

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, or SPR. 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.

US Reserve

The US 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 held in massive and deep underground caverns at four heavily guarded sites along the Gulf of Mexico.

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,” Homayoun Falakshahi, a senior analyst at intelligence firm Kpler Ltd., said before the IEA’s announcement. “The key question is how quick they will release this.”

The US “would likely supply the largest share of any release,” Natasha Kaneva, JPMorgan Chase & Co.’s head of commodity markets strategy, said in a note on Tuesday.

Even if the 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.