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Market Extra: Oil surges, but history says prices eventually fall after countries release emergency reserves

Crude-oil futures saw double-digit percentage gains at Tuesday’s peak, with the advance picking up steam even after a number of countries announced a coordinated release of emergency reserves.

Historically, oil eventually confronts the gravitational pull lower from such releases in the limited number of times that such emergency releases occur, according to a report from Dow Jones Market Data.

April West Texas Intermediate crude
CLJ22,
+8.82%

 
CL.1,
+8.82%

CL00,
+8.82%

finished the day up 8% at $103 a barrel on the New York Mercantile Exchange, with futures running higher as Russia’s siege of Ukraine entered a sixth day and Western sanctions against the Kremlin were taking a toll on supplies amid the threat of a global shortage that had already been in place due to the COVID pandemic.

Prices had extended their gains after the International Energy Agency announced that its member countries, including the U.S., had agreed to release 60 million barrels of oil from their emergency reserves to ease any supply shortfall resulting from Russia’s invasion of Ukraine.

Over the longer term, futures are likely to retreat substantially, if the limited history is any guide.

During the past three emergency releases from the U.S. Strategic Petroleum Reserve, in 1991, 2005 and 2011, oil has had a tendency to decline in six months to a year afterward.

Dow Jones Market Data

In 1991, the Gulf War helped to drive prices higher but an emergency release was followed by price declines that saw crude down nearly 41% a year after the announcement.

In 2005, a release after Hurricane Katrina devastated Gulf Coast oil production saw prices fall in subsequent weeks and months before rebounding to trade with a slight 2.4% gain a year out.

The Paris-based IEA announced that its member countries would release a similar amount of reserves back in 2011, during the Libyan crisis, with values for crude down 12.4% 12 months later, after showing some resilience in the shorter term after the drawdowns were declared.

Uncredited

To be sure, it is unclear what crude futures will do this time with growing uncertainty surrounding the intensity of Russia’s attack in Ukraine. Russia is one of the biggest suppliers of oil and gas throughout the world and matters could get worse before they get better, energy analysts cautioned.

Meanwhile, the broader market was in free fall, with the Dow Jones Industrial Average
DJIA,
-1.88%
,
the Nasdaq Composite Index
COMP,
-1.53%

and the S&P 500 index
SPX,
-1.60%

all trading lower, with only the broad-market benchmark’s energy sector
SP500.10,
+0.73%

showing buoyancy.

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