Key Points
The International Energy Agency announced the largest-ever release of 400 million barrels from emergency oil stocks.
Oil prices rose Wednesday, with Brent and WTI crude each up by nearly 5%, despite the IEA’s oil release.
Traders view the 400-million-barrel release as insufficient to cover 15 million barrels per day lost from the Iran conflict.
The largest-ever release of oil from the International Energy Agency's emergency stockpiles lifted prices for the commodity up by nearly 5% on Wednesday.
It would seemingly make more sense if prices fell, given that more oil is set to hit the market. Yet traders see the emergency release during the Iran conflict as insufficient to cover the virtual halt of oil flow through of the Strait of Hormuz, as well as production shutdowns in the Persian Gulf and crude storage shortages.
The decision is actually "extremely bullish" for prices, as it will drain incentives to offset the loss of oil and reduce options to cushion those losses if the strait remains closed, said Josh Young, chief investments officer at Bison Interests, an oil-and-gas investment firm.
An estimated 15 million barrels per day have been lost for the past 10 days amid the ongoing conflict, Young noted. Given that, the release from the reserves "won't be enough, but it's much better than doing nothing."
May Brent crude climbed 4.8% to settle at $91.98 a barrel on ICE Futures Europe, while West Texas Intermediate crude for April delivery gained 4.6% to settle at $87.25 a barrel on the New York Mercantile Exchange. Both climbed well above $100 on Monday, but have since dropped below that level amid volatile trading and declines of more than 11% on Tuesday.
"Judging by the reaction of oil prices, it looks like the market had discounted the release of 400 million barrels from [the] reserves," said Fawad Razaqzada, market analyst at StoneX. "Prices have barely flinched."
"It looks like investors are not convinced this will have the desired effect and are probably expecting the flow of oil through the Strait of Hormuz to remain effectively closed for a long time," Razaqzada told MarketWatch, noting how Iran has suggested that it is switching from "reciprocal hits" to "continuous strikes."
The International Energy Agency proposed on Tuesday that its member countries release as much as 400 million barrels of oil, leading to a drop in oil prices.
On Wednesday, IEA Executive Director Fatih Birol announced that the group of countries had "unanimously decided to launch the largest-ever release of emergency oil stocks in our agency's history" - making those 400 million barrels of oil available to the global market.
This coordinated stock release is the sixth in history for the IEA. The group's secretariat will provide further details of how this collective action will be implemented in due course.
Japan, which is a member of the IEA, already said it will unilaterally release oil from its strategic reserves as soon as March 16. It will start off by releasing 15 days' worth of privately held reserves and one month's worth of national reserves, according to the Japan Times.
U.S. President Donald Trump offered some comments Wednesday about tapping the country's Strategic Petroleum Reserve in an interview with an Ohio TV station. "We'll reduce it a little bit, and that brings the prices down," he told WKRC. In addition, during a speech in Kentucky, Trump said the record release coordinated by the IEA "will substantially reduce the oil prices."
Late Wednesday, Energy Secretary Chris Wright announced the U.S. will release 172 million barrels from its strategic reserve, starting next week, as part of the IEA's effort.
Insufficient release
Taking a deeper look into the amount of barrels involved in the conflict, Michael Lynch, president of Strategic Energy & Economic Research, estimated that the amount of barrels lost because of the Iran conflict is likely around 175 million barrels since hostilities began on Feb. 28.
Small amounts of oil are still getting out through the Strait of Hormuz, while 1 million barrels per day are coming through Yanbu, an oil export port in Saudi Arabia, and the Red Sea, Lynch said.
In a call with investors, Saudi Aramco CEO Amin Hassan Nasser said the world's biggest oil company, which drills around 7 million barrels per day, is expecting to redirect 5 million barrels to its post at Yanbu on the Red Sea soon.
As loadings at Yanbu ramp up, the loss of oil to the global market will be about 12 million to 13 million barrels per day, said Lynch. Some of that will come back into the market when the strait opens up. For now, it's going into storage, he said.
And storage is running short. Lynch estimates that at least 5 million barrels per day of production is now shut in because of a lack of storage. Production cuts are growing over time and could reach 8 million to 10 million barrels per day soon, he noted.
The IEA release aims to offset those losses, but "also to discourage panic and hoarding," said Lynch. But the amount set to be released is "only enough for slightly more than three weeks of war," he added.
The 'perception is that the release is adequate for now, but not much more.' Michael Lynch, Strategic Energy & Economic Research
So, combined with stories about explosive mines in the Strait of Hormuz, the "perception is that the release is adequate for now, but not much more," said Lynch. "That is probably making people at least a little bullish [on oil prices]."
A key question is just how long the war will last, said Pavel Molchanov, investment strategist at Raymond James, just ahead of the IEA's official announcement. If it lasts significantly beyond the end of March, it may be necessary for IEA members to release more than 400 million barrels, he said.
Trump addressed the possible length of the Iran conflict during his speech in Kentucky on Wednesday. "We don't want to leave early, do we? We got to finish the job, right?" said the president, who on Monday had promised an end to the conflict would come "very soon."