Oil: Reserve release impact weighed against Hormuz risk – MUFG

MUFG’s Senior Currency Analyst Lloyd Chan highlights that Brent Oil has risen above US$90/bbl as supply risks from Iraq and the Strait of Hormuz overshadow the International Energy Agency’s record 400 million barrel emergency reserve release. The report stresses that the scale and pace of the release are small relative to global demand and potential disruption, limiting downside for Oil prices.

IEA release versus Hormuz disruption

"Brent oil prices fluctuated and rose above the US$90/bbl mark, while risk sentiment took some hit, and this came despite the announcement of oil reserves release by the International Energy Agency. Oil prices also rose as reports suggest Iraq’s oil ports have completely stopped operations due to targeting of two tankers within Iraq’s waters."

"In particular, the IEA agreed to discharge 400 million barrels from emergency oil reserves, its largest-ever release, in order to help contain a price spike driven by the Middle East war. For context, this number far exceeds the 183 million barrels that member states released in 2022 after Russia invaded Ukraine."

"The details of the pace of release will be crucial to gauge the market impact, but ultimately the disruption from the Strait of Hormuz is so large that it dwarfs the oil reserve release."

"To put the 400 million barrels in context, it makes up around just 4 days of total daily global demand for oil. In addition, when compared with the Strait of Hormuz where 20% of global seaborn oil passes through daily (~20mn barrels/day), and where there is significant disruption still, it is difficult to replace this longer-term."

"If we assume that the other IEA members follow the US administration’s announced plan to release oil reserves over 120days, this would imply daily flow of 3.3 million barrels a day from the 400 mn barrels release, still not entirely enough to cover the possibly 10-13mn barrels/day shortfall from the Strait of Hormuz (and after accounting for pipelines to divert oil supply away from SoH such as Saudi Arabia’s East West pipeline)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)