On October 15, member countries of the International Energy Agency agreed to release the last batch of their emergency oil plan. That batch holds about 100 million barrels. The countries launched the plan in March. On October 16, Brent crude rose 3.72% to $109.86 a barrel. The release did not stop the rise. The reasons show the limits of emergency oil.
The International Energy Agency, or IEA, is a group of countries that includes the US. It coordinates how members respond to oil supply shocks, meaning sudden drops in the oil available to buy. Crude oil is oil as it comes out of the ground. Brent is the global benchmark for crude, the reference price traders use. Traders price most of the world's oil against it.
The October 15 decision
Bloomberg reported that members agreed to speed up the release of about 100 million barrels. Those barrels are the part of the March plan left to deliver. More than 20 million barrels of that batch is diesel. Members launched the plan in response to the crisis in the Strait of Hormuz. That narrow sea lane between Iran and Oman is the exit route for tankers leaving the Persian Gulf.
The batch completes a promise. In March, members pledged 400 million barrels. They have tapped 330 million so far, according to Anadolu Agency. Tapped means drawn out of storage. The October 15 decision covers the rest of that pledge.
Bar chart comparing the 400 million barrels IEA members pledged in March with the 330 million they have tapped so far
These barrels come with a deadline. The G7 issued a statement on October 2. It set a four-month window to deliver the remaining 100 million barrels. That account comes from S&P Global Platts, as cited by IndexBox. The G7, or Group of Seven, is a club of large advanced economies that includes the US, Japan and Germany.
The US asked for more without making it official. Bloomberg reported that the US had urged an additional release to address rising diesel prices. The US did not put forward a formal proposal at the October 15 meeting.
The mechanics of a coordinated release
IEA members keep emergency oil in storage. Some governments own the oil themselves. The US does this through its Strategic Petroleum Reserve, a set of underground salt caverns on the Gulf Coast. Other countries require oil companies to hold extra oil on top of what they need for daily business.
Members start the process after a supply cut. They agree on a total volume and divide it among themselves. Each government sells or lends its share. A government can let companies dip below their required stock instead. The buyers are refiners, the plants that turn crude into gasoline, diesel and jet fuel.
Members coordinate because buyers trade oil across borders. A country that releases oil alone can watch its barrels sail to the highest foreign bidder. In a joint release, members share the cost. Acting as a group shows buyers that the importing countries are united.
The barrels arrive over weeks and months. Governments cannot deliver stored oil as fast as a shipping disruption cuts supply. The stored oil replaces part of the missing supply while the disruption lasts. Refiners gain a source to buy from when tankers cannot sail.
Governments shrink their stockpiles with each release. Once a government sells stored oil, that oil is gone until the government buys more. That limit makes the size of the remaining pledge important.
Members gave diesel special attention in this batch. Stored diesel has gone through a refinery. Governments can send it to fuel buyers with fewer steps in between. Diesel powers trucks, trains, tractors and many ships. Its price is part of the cost of moving goods. US diesel averaged $6.33 a gallon on October 16, according to AAA data cited by CNBC. That is more than 70% above the same period last year.
Oil prices rose after the decision
Three reasons explain the rise. The first is scale. A release draws on a stock, which is a fixed amount that governments hand out over time. Hormuz carries a flow, which is oil that has to move every day.
Kpler is a firm that tracks tanker cargoes. It put average flows through the strait at 11.62 million barrels a day in the week to October 13. Its baseline, the normal level it measures against, is 17.15 million barrels a day. The shortfall repeats each day the strait stays disrupted.
Bar chart comparing Kpler's baseline of 17.15 million barrels a day through Hormuz with 11.62 million in the week to October 13
A pledge of 100 million barrels sounds large. Governments have four months to deliver it. Over that time, it fills part of a gap that reopens each morning. Traders weigh the one-time pile against that daily gap.
The second reason is news. CNBC reported that Brent hit $110 at one point on October 16 as Iran escalated attacks in Hormuz. The same report said Ukraine vowed to hit Russian refineries. Both events threaten oil supply that has not stopped. Traders react to expected shortages as well as current ones. They knew about the IEA decision before those reports came out.
West Texas Intermediate, the main US crude price, rose 3.51% to $101.41 on October 16. It moved in step with Brent.
The third reason is in company storage tanks. Inventories are the oil that companies hold in storage. US crude inventories fell by 8.56 million barrels in the week ending October 9, according to Grafa. Companies were drawing on their own buffers. Government barrels arrive while those private buffers shrink.
The cushion left behind
With the October 15 decision, members committed the last of the March pledge. Any further release would need a new agreement among members. The US urged that step without a formal proposal.
Governments use emergency stocks to buy time until the disruption ends. The stocks do not change the number of tankers that can pass through Hormuz. The G7 set its four-month window on October 2. That window is the fixed date to track for these barrels.
Reading the next oil headline
The oil price is part of fuel bills, shipping costs and inflation data. Inflation data are the figures that track rising prices across the economy. Investors with no oil company shares feel that effect. Airlines, trucking firms and retailers pay for fuel. Central banks watch inflation data when they set interest rates. Investors use interest rates to judge what stocks and bonds are worth.
A release headline and a price chart can disagree on back-to-back days. That happened on October 15 and October 16. To read them together, compare sizes. Put the stockpile figure next to the daily flow gap through Hormuz.
The first number shows how much cushion governments have handed out. The second shows how much oil the market is missing each day. The diesel price at the pump shows the point where that gap hits trucks, farms and delivery fleets.
Sources
Not investment advice.