Why strategic oil replenishment will take ‘a lot of time’ after the Iran deal – National
If the Strait of Hormuz reopens following the signing of the Iran peace deal on Friday, experts say it will take time to replenish the world’s strategic oil reserves.
The longer it takes to rebuild those reserves, the greater the risk of oil shortages if another global shock requires more oil to be released to market.
“The fundamentals of the oil market have not changed much whether this agreement was signed yesterday or two weeks from now. [currently] it is undersupplied,” said economist Marc Ercolao at TD Economics.
“It’s going to take a lot of time to get that back.”
Oil that is properly positioned is called Strategic Petroleum Reserves (SPR) by industry and markets, and many countries keep a certain amount of oil in these storage areas in case of unexpected shortages.
“[SPRs] they are meant to help to meet global demand at a time when current or conventional sources of supply do not work as well. Now, that means there is demand and usually demand will lead to higher prices,” said Ercolao.
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The International Energy Agency (IEA) requires its 32 member countries to maintain a minimum emergency oil storage capacity equal to 90 days of crude oil and crude oil imports.
Although Canada is a member of the IEA, it is also the only G7 nation that does not have a nationally mandated strategic plan. Mainly that is because the country is a major exporter of crude oil.
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Despite the exemption, Conservative leader Pierre Poilievre called on Ottawa to authorize a strategic reserve as an extra layer of insurance in the wake of the Iran war. At that time, he said, “our stocks are at zero.”
Although China has the largest economy in the world, it is not a full member of the IEA, meaning that the US has the largest strategic stockpile of all IEA member countries.
And the US is reportedly seeing its strategic reserves dwindle.
“In order to make ends meet for the past four months, we have been dipping into reserves that we usually hold on to in case of emergencies. And that is exactly what they are there for. But the thing is that those reserves have started to run out little by little,” said economics professor Moshe Lander from Concordia University.
“Actually, we haven’t reached the stage where the oil has run out, but it was getting dangerously close.”
Earlier this week, the U.S. Department of Energy said crude oil stocks in U.S. storage facilities fell to 340.3 million barrels, the lowest level since 1983.
That’s less than half the capacity of just over 700 million barrels, according to the US Energy Information Administration.
Part of the drawdown is because the United States agreed in March to give up about 170 million barrels of crude oil from its strategic reserves to offset the 400 million barrels coordinated by the IEA and other member countries to help stabilize oil markets.
If the Strait of Hormuz is reopened, there may be a flood of oil heading for global markets, meaning the US may be able to reduce, or stop dipping into, its strategic reserves to help with the deficit left over from the months-long shutdown.
But it will take a few months for things to settle down. This is because cargo ships move slowly, and facilities and infrastructure damaged during the conflict need to be repaired.
Until oil markets normalize, demand for oil will likely remain high, which could mean greater dependence on fossil fuels.
Higher demand for oil usually drives up the price, meaning that consumers and businesses alike may pay higher prices for gasoline and other products for a period of time.
“If we look at the world’s strategic reserves, those have been reduced significantly, but we cannot say that they are at alarming levels at the moment. But if we reduce the US, which is the largest member of this strategic outsourcing system, they have recently reduced their funds to levels not seen since 1983,” said Ercolao.
“At some point, these barrels will need to be refilled, so that the price relief we are seeing now will be stronger. Once the US or any other country has returned to the market to increase the number of barrels in their reserves.”
Ercolao says U.S. stockpiles are on track to reach critical levels next month, and that comes at a time of high demand during the summer travel season, which means more fuel is expected to be used for transportation by road and air.
Markets like the US can support oil demand if their strategic reserves run out by producing and importing more as needed, but not having adequate storage strategies comes with additional risk if there is another global shock, or if the fragile peace deal between the US and Iran unravels.
“The US is carrying 40 to 50 percent of the total [SPR] system. Compared to history and where they should maintain standards, it is at a very low level, or one of the lowest points,” said Ercolao.
“The problem with that is that it leaves little buffer, little room to respond to future shocks.”
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