A historic 400 million-barrel stock release led by the International Energy Agency (IEA) is set to temper supply concerns, though its impact will unfold slowly, as logistical constraints delay its full impact on physical markets, according to experts.
Members of the IEA agreed on March 11 to coordinate the largest emergency stock release in the agency's history. The move is designed to offset supply disruptions stemming from escalating Middle East conflict.
US Department of Energy confirmed on March 12 of its plan to release 172 million barrels of crude from Strategic Petroleum Reserve over roughly 120 days.
The IEA detailed on Sunday plans for member countries to release the emergency stocks. According to the plan, Asia-Pacific members will release their stocks "immediately," while countries in the Americas and Europe will start deliveries from the end of this month.
Of the total 400 million barrels, 72% will be crude oil and 28% refined products. Asia-Pacific members will provide 66.8 million barrels from strategic reserves and 41.8 million barrels from industry stocks, and Europe will release 32.7 million barrels from strategic reserves and 74.8 million from industry stocks. Canada will also make 23.6 million barrels available from domestic producers to support the initiative.
IEA Executive Director Fatih Birol said on Monday that the 400 million barrels agreed for release have started flowing to Asian markets. Birol noted that while the release has had an economic impact and oil prices have declined compared to last week, the long-term solution remains the resumption of oil flows through the Strait of Hormuz.
- Physical market impact to take time
Kenneth Medlock, senior director of the Center for Energy Studies at Rice University's Baker Institute, told Anadolu that the release will take time to fully impact the physical market.
"There are logistical matters to be worked out before barrels actually arrive on ships and/or move to refineries," Medlock explained, adding that the release of strategic stocks will only reduce price if there are no other issues.
"Stock releases typically reduce volatility because they make short run supply more elastic. In other words, the constraint associated with the closure of the Strait of Hormuz become less binding," he said.
However, he noted that if conflict escalates resulting in extensive damage of production and export infrastructure, then the closure of Strait is no longer the only issue.
"In that case, even if the Strait reopens, exports won't be able to return to 'normal' levels anyway. That will push prices up along the forward curve and offset, to some extent, the impact of the release from strategic stocks. The bottom line is this is a very dynamic situation," he said.
The release from strategic stocks is positive, but there are also many other moving parts that play a role in market price, according to Medlock. "That stated, if the release did not happen, prices would be higher and more volatile."
He added that strategic stocks are not a long-term solution. "Any inventory in any market can only serve as a short-run mitigator of supply chain disruption. The case of strategic inventories is a special case of where governments do what commercial firms do all the time to manage short term supply chain disruptions in any market. For the oil market, the only long-term solution is for oil to begin flowing again out of the Persian Gulf region," he said.
- Geopolitical risks continue to drive prices
Oguzhan Akyener, president of the Turkish Energy Strategies and Policies Research Center (TESPAM), said that the recent oil price surge is largely driven by geopolitical risk perceptions rather than supply shortages.
He noted that while passage through the Strait of Hormuz has slowed, it continues in a controlled manner, and there is no major disruption to physical supply.
However, concerns that the conflict could escalate have increased risk premiums in the market.
"Releasing strategic reserves provides a stabilizing effect on supply and exerts downward pressure on prices, but because price increases are mainly driven by risk perception, this move has not fundamentally changed market expectations," Akyener said. "Without this release, oil prices could have reached $107–108 per barrel," he added.
By Ebru Sengul Cevrioglu
Anadolu Agency
energy@aa.com.tr
