ANALYSIS: US strategic crude release may signal diminished role for IEA

23 Nov 2021

Quantum Commodity Intelligence - By deciding to release emergency crude stocks in concert with several countries, but without involvement from the International Energy Agency (IEA), the US has created a precedent that signals the agency's diminished role in oil markets and sets a precedent to use stocks to calm energy prices.

On Tuesday, the US announced the release of 50 million barrels of oil from its Strategic Petroleum Reserve in a bid to reduce US gasoline prices, which will be released in concert with China, India, Japan, South Korea and the UK.

In the past, such releases have been coordinated by the IEA and all of its members.

This was the case in 2005 when 26 IEA member countries agreed to release 60 million barrels for a period of 30 days in response to Hurricane Katrina, and in 2011 when a supply outage in Libya triggered a similar response.

But this time, only these five countries (plus the US) will participate in the coordinated release, of which two - India and China - are not even members of the IEA.

While it is impossible to know what was discussed between the US Administration and the IEA prior to the announcement, it's likely the agency rejected any calls to help coordinate a release in the absence of what it would consider a genuine case of a supply shortage.

In a guarded statement, the IEA said it noted the announcement of the US and recognised the "rise in oil prices burden on consumers" and "respected the assessments and decisions made by individual IEA members and partner countries on how best to respond to the specific challenges and circumstances they each face."

Unilateral action has taken place previously in a bid to quell prices, such as when the US released stocks during Hurricane Harvey in 2017 and again during Hurricane Ida this September. Still, there is no precedent for such a globally coordinated release without direct IEA involvement.

Strategic stocks

The IEA was created in the 1970s following the Arab oil embargoes, with a mandate to expand and coordinate strategic crude oil releases: in essence it was designed as a counter to OPEC.

And even if its role has largely evolved since, it still employs around 20 analysts dedicated to the oil market who track inventory levels in various member states.

IEA members hold over 4 billion barrels of public and commercial oil stocks. Of those, roughly 1.4 billion barrels are government-controlled.

The agency has always said that these emergency stocks exist to relieve temporary stresses in the supply chain created by one-off disruptions, such as a blockade, a supply outage or a natural catastrophe, but not as a tool to tamper with prices.

Yet, that is exactly what the Biden Administration has done, with the US Department of Energy saying the release was "in response to the highest oil prices experienced in seven years."

US bank Goldman Sachs last week warned that a release of strategic crude reserves would create clear upside risks to oil prices in 2022, claiming it would only provide a short term fix to a structural deficit, was already priced in and would slow a global oil supply response.

"In fact, if such a release is confirmed and manages to keep oil prices depressed in the context of low trading activity into year-end, it would create clear upside risks to our 2022 price forecast," it said.

And the decision runs against the IEA's own analysts, who recently signalled that oil supply increases were on the horizon over the next few months.

Taking the agency's most recent demand forecast for 4Q21 (98.9 million bpd), its non-OPEC supply forecast (65.3 million bpd), and assuming OPEC production reaches 33.5 million bpd in line with previous commitments by the cartel, the global oil market is almost equally balanced between demand and supply.

The fear now, voiced by observers, is the cartel may rein in supply increases in response to this latest announcement over the coming months, although this would be unlikely to create more than a minor supply shortage that existing commercial stocks could easily solve.

Token stock releases

The public announcements by Japan, Korea and the UK imply that they will release limited crude volumes over the coming months.

Japan said it would "release a few days' worth [of stock] first and then consider additional releases," local news NHK reported.

The UK, meanwhile, has agreed to release 1.5 million barrels of crude, but this will be voluntary, not mandatory.

As for Korea, it has not even yet determined what volume of crude will be made available and is awaiting further discussions with the US.

This suggests that these three countries, which are close allies of the US, felt compelled to make a show of public support.

This, in turn, paints a different picture of a US largely isolated in its wish to use strategic reserves to reduce oil prices.

The decisions by China and India to participate are more meaningful, as these two countries have become increasingly concerned about rising energy prices in recent months. Still, China's measures have not yet been spelt out.

As for the IEA, its focus has largely shifted to the energy transition in the last decade.

Its net-zero pathways published earlier in the year were widely distributed, and the World Energy Outlook remains the gold standard for long-term energy scenarios.

However, there is no doubt the agency will assume a central role once again if a significant oil supply crisis rears its head, it's just that it no longer has exclusivity over coordinated action.