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Commodities Corner: Emergency plan to ease global oil-shortage fears amid the Ukraine-Russia crisis has seemingly backfired—here’s why

The International Energy Agency announced Tuesday that its member states have agreed to release oil from their emergency reserves, but the move to ease worries about a global shortage, fed by Russia’s invasion of Ukraine, appears to have backfired.

“ ‘What we have going on with Russia is a defector embargo, and the coordinated release of 60 million barrels really doesn’t amount to something that might have a big impact.’”

— Tom Kloza, global head of energy analysis at OPIS

Oil on Tuesday extended its rally following the news, with prices climbing to their highest levels in more than seven years. U.S. benchmark West Texas Intermediate crude for April delivery
CLJ22,
+8.65%

CL.1,
+8.65%

rose $9.63, or 10.1%, to $105.35 a barrel on the New York Mercantile Exchange, while global benchmark May Brent crude
BRNK22,
+7.85%

BRN00,
+7.85%

traded at $106.46 a barrel on ICE Futures Europe, up $8.49, or 8.7%.

“What we have going on with Russia is a defector embargo, and the coordinated release of 60 million barrels really doesn’t amount to something that might have a big impact,” said Tom Kloza, global head of energy analysis at OPIS, a Dow Jones Company.

The Paris-based IEA announced Tuesday that its 31 member countries agreed to release 60 million barrels of oil from their emergency reserves in a move to send a “unified and strong message to global markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine.”

It’s a “nice try,” but the total release only adds up to about “six tenths of one day’s worth of oil needs,” Kloza told MarketWatch.

Drop in the bucket

Global oil demand is estimated at 100 million barrels per day. Russia’s oil production was at about 10.04 million barrels per day in January of this year – just below its target level of 10.12 million bpd, according to the IEA’s monthly oil market report released in February.

“ ‘Traders think the release announced could be a prelude to bigger sanctions and a larger loss of supply.’”

— Michael Lynch, president at Strategic Energy & Economic Research

Michael Lynch, president at Strategic Energy & Economic Research, said not all Russian production will be lost, and that the “reluctance” of some oil buyers would lead to a loss of two to three million barrels a day. Given that, the size of the reserve release “isn’t bad.”

But the oil market’s reaction suggests that it expects a “bigger loss from Russia, especially if the violence escalates, as seems increasingly likely,” Lynch told MarketWatch. “Traders think the release announced could be a prelude to bigger sanctions and a larger loss of supply.”

In that case, a 60 million-barrel release is “woefully insufficient,” he said.

‘Panic mode’

For now, the oil market appears to be in “panic mode amidst uncertainty,” said Manish Raj, chief financial officer at Velandera Energy Partners. “It is not clear how many actual Russian barrels have been removed or will be removed from exports.”

“Exacerbating the problem is the fact that U.S. and global inventories are already at multi-year lows,” he said.

In a meeting Tuesday, the IEA ministers pointed out that global oil markets were tight even before Russia’s invasion, and that commercial inventories are at their lowest level since 2014, with a “limited ability of producers to provide additional supply in the short term.”

Oil in the U.S. Strategic Petroleum Reserve stands at a total of 580 million barrels, following previously announced drawdowns of 5.4 million in January and 8.3 million in February.

Raj said the U.S. SPR volume is the lowest since 2001, and already down by 55 million barrels in the past year, as the Biden administration moves to sell from the reserve to lower oil prices.

‘Hurricane Vladimir’

So far, the decision to sell oil from the U.S. reserve has done little to reduce prices of gasoline. On Tuesday, the wholesale price of gasoline was up 35 cents a gallon in New York and 22 cents a gallon in California, said OPIS’ Kloza.

“I’ve seen these kind of moves only in the wake of hurricanes, but I suppose we have Hurricane Vladimir,” he said, referring to Russian President Vladimir Putin.

On Tuesday afternoon, the average U.S. price for regular unleaded gas stood at $3.621 a gallon, up 22.1 cents from a month ago, according to GasBuddy.

The IEA’s decision comes ahead of Wednesday’s monthly meeting of OPEC+ — which is made up of the Organization of the Petroleum Exporting Countries and their allies, including Russia. The producer group is expected to make a decision on oil production levels for April.

Analysts, generally, still expect OPEC+ to continue its plan to raise production by 400,000 barrels per day.

Expectations that OPEC+ will go ahead with its planned 400,000 barrel-per-day increase when they meet Wednesday, “reflects, in part, the lack of spare capacity that has kept them from fully implementing the increases in recent months,” said Marshall Steeves, energy markets analyst at S&P Global. Saudi Arabia and the United Arab Emirates are really the only OPEC members who have much spare capacity, but the Saudis have yet to commit to tapping it, he said.

On Tuesday, Putin held talks with Abu Dhabi’s Crown Price Mohammed bin Zayed to discuss OPEC+ strategy ahead of the monthly meeting, according to a report from S&P Global. The progress of implementing the OPEC agreement was discussed, the report said, citing an official statement from the Kremlin.

Meanwhile, the rally in oil Tuesday has led to talk of record-high prices. WTI oil settled above $145 and hit an intraday high above $147 in July of 2008.   

If the Russia-Ukraine war ramps up further and threatens Russian exports, WTI could revisit the highs of $146/bbl., hit in 2008, said Steeves, though there is likely to be “demand destruction as prices rise from here.”

For now, “oil above $100 is likely persist as long as hostilities do,” he said.

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