Emergency oil can't fill the gap

The International Energy Agency's coordinated release of 400 million barrels of crude and refined products from strategic reserves was billed as a multilateral effort with no precedent. Energy economists and physical oil traders were unmoved. Releases of this kind cannot replace 20-million-barrel-per-day of supply stuck behind a blocked strait.

Built for a different crisis

The IEA was set up in 1974, in the aftermath of the Arab oil embargo, and its members agreed to hold emergency stocks equal to at least 90 days of their net oil imports. The system was designed for disruptions that are either short or partial: a hurricane shutting refineries on the Gulf of Mexico, a war in a single producing country, a sudden loss of a few million barrels a day. Its collective releases have followed that pattern, from the Gulf war in 1991 to Hurricane Katrina in 2005, the Libyan civil war in 2011 and the two releases after Russia invaded Ukraine in 2022. This release is more than twice the combined size of the two in 2022, and it still falls short.

The sums do not add up

Emergency stocks run out. About twenty million barrels of oil normally pass through the Strait of Hormuz each day. Even if the IEA members pump out stocks at full speed, around four million barrels a day, they cover barely one-fifth of the lost flow. Within one hundred days the world's strategic reserves would be empty, with nothing left to cushion the economy.

Put the other way round, 400 million barrels equals about twenty days of normal Hormuz traffic. A release spread over three months replaces a fraction of each day's loss, and the rest has to come from somewhere else. With pipelines around the strait already running near their limits, the only other source is lower consumption. Prices will rise until enough drivers, airlines and factories use less.

That is why the price response is so violent. In the short run, demand for oil barely responds to price, because people still need to drive to work and lorries still need diesel. Closing a gap of many millions of barrels a day through demand alone requires a very large rise in price, and a release that narrows the gap only modestly shortens the required rise only modestly.

The wrong oil in the wrong place

Strategic stocks also sit in salt caverns and commercial tank farms spread across North America, Europe and Japan. Pumping that crude into local pipelines does nothing for Asian refineries built to run sour Gulf grades.

Quality and distance both matter. Refineries are configured for particular types of crude, and a plant designed to process heavy, high-sulphur oil from the Gulf runs less efficiently on the lighter, sweeter grades that make up much of the reserves in the West. Moving American or European barrels to Asia also means weeks at sea and chartering tankers at a time when every available vessel is in demand. Some of the relief will therefore reach Asian refiners indirectly, as Western refiners use strategic crude and free up Atlantic Basin cargoes that can be sent east, a slower and costlier route.

The American contribution carries its own history. Washington sold 180 million barrels from its strategic reserve in 2022 to damp prices after Russia's invasion of Ukraine, and the reserve fell to its lowest level in four decades the following year. Repurchases since then have been gradual, so the reserve entering this crisis was well below its capacity. Each barrel released now leaves less for any later emergency, and it will have to be replaced by purchases that add to demand once the crisis ends.

Asia's own stocks are uneven. Japan and South Korea built large government and private stockpiles after the shocks of the 1970s and can draw on them for months. China has accumulated sizeable reserves over the past two decades, though it publishes little about them, while India's strategic caverns hold only a few days of its consumption. The countries most dependent on Gulf crude are therefore not equally able to wait.

Who benefits from the release

The release helps most the refiners located near the reserves, in the United States, Europe and Japan, which get access to crude at a time when spot cargoes are scarce. Consumers in those countries gain a little from lower pump prices than they would otherwise face. Asian importers without large stocks of their own gain least, and the governments running down their reserves take on a future bill, because every barrel sold now will have to be bought back later, probably at higher prices than those that prevailed before the crisis.

The futures curve shows the stress. When physical oil is scarce, prices for immediate delivery rise above those for later months, a pattern called backwardation, because refiners will pay a premium for barrels they can use now. A strategic release eases that premium at the front of the curve without changing the expected price further out, which is why the effect of such announcements usually fades once traders see that the underlying shortage has not changed.

What a release can still do

The case for the release is that it was never meant to replace Hormuz. Emergency stocks buy time for diplomacy, for navies to secure shipping lanes and for demand to adjust gradually rather than in a single shock. A coordinated announcement also signals that consuming countries are acting together, which can reduce panic buying and hoarding. The IEA's emergency framework includes demand restraint as well as stock releases, and governments can ask consumers to cut non-essential use. Those are real benefits, but they work best in a disruption measured in weeks.

The signals to watch are the pace of drawdowns reported by member governments, the spread between prompt and later-dated oil futures, which widens when physical supply is tight, the premium on Gulf-grade crude in Asia, and any sign of tankers moving through the strait. Strategic reserves can buy a few weeks, but they cannot replace open shipping lanes. If Hormuz stays shut for months, the world will probably use up its emergency buffer and still face the same shortage.