IEA Proposes Largest Ever Oil Stockpile Release... There Is Just One Big Problem

It's setting up to be another rollercoaster night session. 

Shortly after 8pm ET, oil slumped and S&P futures rose as risk sentiment got a boost from the latest coordinated attempt to jawbone oil prices lower when the Wall Street Journal reported that the International Energy Agency has proposed the largest release of crude oil reserves in its history. 

The amount of the release, which is intended to counter the massive disruption caused by the near-total closure of the Strait of Hormuz, was unclear - in keeping with attempts to keep jawboning oil lower on vague generalities and without giving specific numbers or certainly "doing" something besides talking - but would reportedly exceed the 182 million barrels of oil that IEA member countries put onto the market in two releases in 2022 when Russia launched its full-scale invasion of Ukraine, the report said. WTI crude, which rose almost 3% to just over $88 a barrel after the US cash close, slid more than 1% to trade just below $83 a barrel just after the report.

While on the surface the news would be bullish for risk, a sizable problem emerges when taking a closer look at the proposal.

Actually a couple of problems.

First, countries are expected to decide on the proposal Wednesday, and it would be adopted if none objects, but even one country’s protests could delay the plan. As a reminder, yesterday a similar plan was scuttled when France and Portugal objected much to the chagrin of Japan which is desperate to keep oil prices low as any continued rise in energy costs will surely force the BOJ to hike rates, sending the country's wealth effect, i.e., the liquidity-supported Nikkei, into a tailspin.

Second, optics. Previous releases from strategic reserves have had mixed results. When IEA members did not one but two releases in quick succession after Russia invaded Ukraine in early 2022, the move at first caused oil prices to rise 20% as traders saw the release as a sign the oil crisis was more serious than they had anticipated. The releases eventually helped bring prices down, but at the cost of draining the US Strategic Petroleum Reserve in half, which is where it is to date.

Third, and most pressing, is the challenge we discussed earlier today in "Here Are The 6 Options To Contain Soaring Oil Prices (And Why An SPR Release Will Do Very Little").

For those who missed it, JPMorgan's commodity strategist Natasha Kaneva looked at the six options countries have to contain rising oil prices, focusing understandably on the most potent of these: a coordinated release from strategic petroleum reserves. Pointing to media rumors ahead of the WSJ report that G7 governments are discussing a coordinated SPR release of 300–400 million barrels under the IEA’s coordination, JPMorgan found that at its core, an SPR release, no matter how big, would not be able to offset the biggest issue facing global energy markets: the sudden elimination of the roughly 16 million barrels currently stuck inside the Gulf due to the Strait of Hormuz blockade. That's because it's not a stock, but rather a flow problem.

Here's the background: as of this moment, total OECD SPR stocks are 1,247 mb, including 935 mb of crude and 312 mb of products. 

The United States, which has the largest SPR of any western nation, would likely supply the largest share of any release, with additional barrels from Japan, South Korea, and European strategic stocks. China, which some speculate has as much as 1.5 billion barrels stashed away in its own SPR, is unlikely to participate, although it may resort to using up its own inventory. 

And here is where the math spoils the day. With the US SPR at around 415 mb, or about 58% of capacity, and site modernization work ongoing, operational flexibility is likely to be lower than before the 2022 drawdown. As a result, JPMorgan calculates that realistic US SPR releases today are likely below the 1.0 mbd pace averaged in 2022 because inventories are lower and salt‑cavern integrity and deliverability constraints cap withdrawal rates, something we warned about all the way back in 2022.

The drains will continue until the salt caverns collapse https://t.co/pSxiJjzlQT

— zerohedge (@zerohedge) November 30, 2022

There are also limits on how far inventories can be reduced. Congress mandates a minimum SPR level of 252.4 million barrels, which it can adjust, as it did in the 2021 Bipartisan Infrastructure Bill. The President has the authority to draw the SPR below that threshold by declaring a “severe energy supply interruption,” as President Biden did in the spring of 2022 to trigger the 180 million‑barrel sale.

Even so, JPM warns, the SPR has a practical operational floor near 150–160 mb that must remain in place to preserve cavern stability and maintain operational flexibility, including a small portion of “roof oil” that cannot be withdrawn. There are also execution lags. Once a presidential order is issued, DOE can award contracts and begin deliveries in about 13 days, and additional shipping time is needed before volumes reach end consumers.

In other words, we are looking at the end of March before SPR deliveries realistically will hit the market. By then, the cumulative oil deficit due to the Iran war will be 100+ million barrels.

And here is the punchline: JPM estimates that once the drain begins, a coordinated G7 SPR release rate of only 1.2 mbd across participating countries is feasible. Historically, OECD emergency releases have peaked around 1.4 mbd, calculated as the sum of different countries’ monthly peaks achieved in different months.

While helpful, that pace would be far too low to materially ease a 16 mbd shortfall and would likely provide only initial relief while pre‑escalation cargoes are still arriving. Once those shipments clear and new loadings fail to depart, a 1.2 mbd release would be insufficient to counter potential losses of roughly 12 mbd within two weeks due to the forced shut-ins we discussed previously... 

... which as Bloomberg reported this morning, have already removed as much as 6.7 million barrels of supply from the market, and rising every day the SoH is blocked.

• *SAUDI, UAE, IRAQ, KUWAIT CUT OIL OUTPUT BY AS MUCH AS 6.7M B/D

In short, the IEA may hope to "shock and awe" the market with the size of the total release (stock), but ultimately the actual pace of SPR drainage (flow) would be far too low to make a material impact, and worse, would leave western countries even worse off and with a lower margin of emergency safety, should the Iran war extend into April or longer.

More in the full JPM report available to pro subs.