Suspense Resolved! 400 Million Barrels of Reserves Rush to Market, Why Does International Crude Oil Continue Surging?

As market assessments of crude oil supply prospects change, international oil prices experienced epic volatility this week.

According to Dow Jones market data, on Monday, WTI and Brent crude oil prices both reached nearly $120 per barrel intraday before falling back. On Tuesday, both benchmarks posted their largest single-day percentage declines since March 9, 2022. On Wednesday, international oil prices fluctuated again by over 6% intraday, as investors grappled with a tug-of-war between bullish and bearish concerns over oil supply.

In terms of news, the International Energy Agency (IEA) decided on Wednesday to release 400 million barrels of emergency oil reserves from member countries. Earlier, G7 ministers held a meeting on Monday to discuss coordinating the release of oil supplies through the IEA.

Analysts believe that panic in the oil market has eased somewhat, but concerns remain that the strategic reserves released by various countries are still insufficient to fill the Middle East supply gap.

Limited Effectiveness of Reserve Releases

Rebecca Babin, Senior Energy Trader and Managing Director at CIBC Private Wealth, said that while oil prices are falling, “the emergency reserve release agreement itself has limitations because crude oil does not enter the market immediately: ‘Auctioning, shipping, and actual injection into the system all take time.’”

She believes that the speed at which reserves can be released is practically limited. During the largest coordinated release after the Russia-Ukraine conflict in 2022, the maximum actual release rate was about 1.2 million barrels per day, which may already be the market’s expected upper limit. In comparison, the scale of current Middle East supply disruptions is much larger, estimated at about 16 million barrels per day—roughly the amount typically transported through the Strait of Hormuz, one of the world’s most critical oil shipping chokepoints. “Some shipping is still ongoing, while others are rerouted, mainly via Saudi Arabia’s east-west oil pipelines and a small amount through the UAE to Fujairah. But estimates show that about 10 million barrels per day are affected or cannot pass efficiently.”

JPMorgan estimates that a coordinated G7 release of 1.2 million barrels per day is feasible. While “helpful,” it cannot substantially alleviate the 16 million barrels per day supply gap, only providing initial relief while ships are still arriving at ports before the conflict escalates. Once these ships clear customs and cannot set sail again, the 1.2 million barrels per day release will be insufficient to address potential supply losses—JPMorgan projects the gap could reach 12 million barrels per day within two weeks.

Data from AAA and GasBuddy, a fuel price tracking platform, show that due to concerns over Iran-related conflict triggered by US-Israel tensions, the national average gasoline price in the US surpassed $3.50 per gallon this week, reaching the highest level since May 2024. In just 11 days, prices have risen by 20%, comparable to the increase seen four years ago during the Russia-Ukraine conflict outbreak.

Former US President Donald Trump is also considering various measures, including releasing emergency reserves, suspending federal gasoline taxes, and involving the US Treasury in oil futures markets. After the Russia-Ukraine conflict in 2022, the US released 180 million barrels of strategic petroleum reserves, depleting inventories. The US Energy Department reports that the current US strategic petroleum reserve stands at about 416 million barrels, well below the full capacity of 727 million barrels.

Babin notes that US strategic reserve releases are usually only effective in the short term, with limited long-term impact. In spring 2022, the Biden administration ordered a historic release of 180 million barrels to ease oil prices; in July of that year, the US Treasury said analysis showed that coordinated releases with IEA partners lowered gasoline prices by 17 to 42 cents per gallon.

The Strait of Hormuz Remains Key to Stability

After the IEA’s announcement of reserve releases caused a brief dip, oil prices rebounded sharply, with WTI returning above $87, gaining nearly 6%. The safety of the Strait of Hormuz has once again become a focus of market attention.

Jim Reid, Head of Macro Research and Thematic Strategy at Deutsche Bank, wrote in a report to First Financial that investors will “closely monitor” whether exports from the Strait of Hormuz can resume from their current near-standstill, especially after Saudi Arabia, the UAE, and Kuwait announced oil production cuts on Monday.

The US Energy Information Administration (EIA) released its monthly report on Tuesday, stating that a hypothetical closure of the Strait of Hormuz would lead to further declines in Middle Eastern oil production in the coming weeks. The report forecasts that Brent crude prices will stay above $95 per barrel over the next two months, fall below $80 in the third quarter, and drop to around $70 by year-end, depending on the duration of the conflict and resulting production disruptions. The EIA also raised its 2026 average Brent crude price forecast to $78.84, nearly 37% higher than its February forecast.

Goldman Sachs estimates that if Persian Gulf oil exports decrease by 15 million barrels per day for 60 days, oil prices could stabilize in the $89 to $93 per barrel range.

Commodity research firm Global X analyst Kenny Zhu commented via email, “The Iran conflict continues to develop, with no clear signs of ending. While we cannot predict when the Strait of Hormuz disruptions will cease or how the conflict will resolve, this situation has already increased volatility in energy markets, forcing global oil and gas tankers to reroute.”

Most institutions agree that the best long-term solution to stabilize oil prices is restoring safe and reliable passage through the Strait of Hormuz.

Simmons & Co. Chairman and Chief Analyst Simon Froules said that after the conflict ends, “the supply chain won’t restart quickly.” While refineries or ports may be able to ship stored refined products relatively fast, if oil wells remain shut for a long time, restarting to full capacity could take weeks or even longer.

(Article from First Financial)