U.S. Petroleum Reserve Release Will Likely Boost Oil Exports to Asia

The conflict between the US., Israel and Iran is entering its third week and the Strait of Hormuz remains virtually closed. This has tightened the oil markets. Oil prices have been very volatile, but they have been clearly trending up since the conflict started. As we already stated in previous analyses, the unprecedented oil supply crunch was almost inevitably going to trigger a release of strategic reserves.

Last week, the 32 member countries of the International Energy Agency (IEA) authorized a record-breaking coordinated release of 400 million barrels (Mb) of oil from emergency reserves. To put this global Strategic Petroleum Reserve (SPR) release into perspective, it is more than double the size of the previous record, the release of 182.7 Mb of oil reserves in 2022, following the Russian invasion of Ukraine. This was done in two stages: 62 Mb on March 1st and 120 Mb one month later (the U.S separately added another 90 Mb).

This is the sixth coordinated stock release of the IEA. Previous releases were done in 1991 (Persian Gulf War), 2005 (Hurricanes Katrina and Rita), 2011 (Libyan Civil War) and 2022 (Russia/Ukraine). IEA members hold emergency stockpiles of over 1.2 billion barrels, with a further 600 Mb of industry stocks held under government obligation.

While the 1.2 billion barrels are owned by the respective governments, the 600 Mb held “under government obligation” are held by private companies, like refiners and importers. They store this oil as part of their normal operations, but they are not allowed to let stock levels fall below a certain “obligated” floor. The government can “release” these stocks by lowering this mandatory storage level, allowing companies to sell that oil on the open market. European countries tend to rely more on these government obligation stocks since they generally do not hold large central reserves themselves.

The U.S is the largest contributor to the current 400 Mb release with 172 Mb, all coming from the government owned Strategic Petroleum Reserve. Japan supplies 80 million barrels (both national and privately held reserves). Lesser volumes come from South Korea (22.5 Mb), Germany (19.5 Mb), France (14.5 Mb), the United Kingdom (3.5 Mb) and Spain (11.5 Mb). Countries outside of the IEA have not announced meaningful stock releases. India has ruled out a release from it SPR at this point, while it supports the actions of the IEA. China, has large reserves, estimated to be sufficient to cover more than 100 days of net oil imports. However, they have not announced any releases to coincide with the IEA action.

While the total volume of the coordinated IEA release is significant, the barrels can only be distributed over time. The release schedule will be different for each country. For the tanker market, the plans for the U.S. are the most important, because these barrels are most likely to be shipped overseas. SPR releases from Europe, Japan and South Korea as well as China (if and when they join) will likely be distributed domestically, with no meaningful seaborne transport needed. This is particularly relevant for the aforementioned “government obligation stocks” that are held by local refiners. The release of these stocks effectively means that they can run down inventory.

The U.S. Department of Energy has established a 120-day delivery window for the 172 Mb, starting next week: 20-25 Mb in March; 43 Mb in April, May and June (peak delivery) and 18-23 Mb in July. This is equivalent to some 1.4 Mb/d at peak delivery. This volume will likely test the release capabilities of the SPR.

Since the U.S. is a net exporter of oil, these SPR releases will likely lead to higher exports from the U.S. Gulf. During the 2022 SPR releases, the oil was sold on the open market, and while most oil was bought by U.S. refiners (because they have easy access via pipelines), significant volumes went to Europe (replacing Russian crude) and Asia.

This time, chances are that even more oil will go to Asia since they are the most affected by the crisis in the Middle East (80% of Middle Eastern oil exports go to Asia). If India, South Korea and/or China are the buyers of incremental barrels from the U.S., this could benefit long-haul VLCC demand and support freight rates as long as a material portion of the global tanker fleet remains stuck in and around the Persian Gulf. However, a prolonged closure of the Strait of Hormuz raises the risk of oil demand destruction and threatens the long-term health of the tanker market.

This post appears courtesy of Poten & Partners and has been adapted for formatting.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.