Strait of Hormuz Shutdown Triggers Potential For Record Oil Release According To Report

The International Energy Agency has proposed the largest ever release of oil reserves, according to the Wall Street Journal, as governments seek to contain a spike in energy prices driven by the Middle East war.

Vandana Hari, Founder of Vanda Insights, discusses her outlook on the oil markets - She speaks with Haidi Stroud-Watts and Avril Hong on Bloomberg: The Asia Trade.

A widening war and the near total closure of the Strait of Hormuz have led to cuts from Persian Gulf producers that have so far shaved about 6% of global oil output, sending prices of everything from jet fuel and cooking gas soaring across the world.

Millions of barrels of crude and fuels remain stuck on tankers that can’t cross the narrow strait, where ships have been attacked. The jamming of signals has made it even tougher and unsafe for vessels in the area. 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 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 fuel releases — details that will be key for energy markets. Japan said earlier it would unilaterally release about 80 million barrels, starting as soon as March 16.

Oil soared to almost $120 a barrel in London earlier this week as flows through the Persian Gulf’s critical Strait of 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.

The most important thing for the stability of energy markets remains the resumption of traffic through the strait, Birol added.

The IEA’s move exceeds the 182.7 million barrels that member states ultimately put into the market in 2022 after Russia invaded Ukraine. That action, formally approved at a meeting of the agency’s governing board in March of that year, equated to a release of 2 million barrels a day in its initial month, and was subsequently extended and supplemented.

But potential supply losses from this crisis may be much bigger than in 2022.

While global oil markets had been in surplus at the start of this year, that picture has been upended by the effective closure of the Strait of Hormuz, through which about 20% of the world’s seaborne oil normally flows.

Output Cuts

With storage tanks in the region filling up, major producers including Saudi Arabia, the United Arab Emirates and Iraq are deepening supply cuts, shaving about 6% off global output. The UAE also halted operations at its biggest refinery, Ruwais, on Tuesday as a precaution after a drone strike in the area.

The IEA, which co-ordinates stockpile releases for OECD countries, 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. 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.

The US Strategic Petroleum Reserve, or 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 contained 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.

--------

Watch Bloomberg Radio LIVE on YouTube

Weekdays 7am-6pm ET

Follow us on X

Subscribe to our Podcasts:

Bloomberg Daybreak

Bloomberg Surveillance

Bloomberg Intelligence

Balance of Power

Bloomberg Businessweek

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app:

Apple CarPlay

Android Auto

Visit our YouTube channels:

Bloomberg Podcasts

Bloomberg Television

Bloomberg Originals