A pump jack is seen at sunrise near Bakersfield, California October 14, 2014.
Lucy Nicholson | Reuters
Oil prices surged more than 7% Thursday, as traders appear to be unconvinced that government stockpiles can offset the massive supply shock triggered by the war in the Middle East.
The West Texas Intermediate jumped 7.5% to $93.8 per barrel, while global benchmark Brent was trading around 7.74% higher at $99.1, even after the International Energy Agency announced its largest emergency release of crude reserves in history.
The IEA said Wednesday that its 32 member countries would release 400 million barrels of oil from emergency reserves, marking the biggest coordinated drawdown since the agency was created in the aftermath of the 1973 oil embargo.
The United States announced that it would release 172 million barrels from its Strategic Petroleum Reserve, with Energy Secretary Chris Wright saying shipments could begin next week and take roughly 120 days to complete.
The IEA decision also signals how acute the oil shortage risk is, suggests the IEA does not believe the war is unlikely to end soon.
The oil market has shrugged of those announcements as prices continue to rise, highlighting traders’ skepticism that the measures will help bridge what analysts said could the supply gap if flows through the Strait of Hormuz remain disrupted.
“Prices right now are still in panic mode. There is a lot of emotion, fear, uncertainty built into the price that we see,” said Pavel Molchanov, senior investment strategist at Raymond James.
The record IEA strategic stock release will add some much needed volumes to the market, albeit only closing up to a quarter of the 20 million barrels per day supply gap posed by the closure of the Strait of Hormuz, said Saul Kavonic, energy analyst at MST Marquee.
“But the IEA decision also signals how acute the oil shortage risk is, suggesting the IEA does not believe the war is [likely] to end soon, and stock draws now will need to be replaced later, portending higher prices even after the war ends,” he told CNBC.
Roughly a fifth of global oil supply passes through the Strait of Hormuz that links the Persian Gulf to global markets.
Timing and logistics remain unclear
One key reason markets remain uneasy is uncertainty about how quickly the barrels will reach the market, said industry veterans.
While the IEA’s announcement marked an unprecedented intervention, the agency did not provide details on how fast individual countries will release their reserves or how the oil will be distributed.
“That’s one of the key question marks, which is how long will it take for the 400 million barrels to be physically delivered onto the market,” said Molchanov.
Oil prices since the start of the year
“Four hundred million is a big number … but this is the largest oil supply disruption since at least the 1970s so we need a lot of oil, and we need it quickly,” he said.
Strategic stockpiles are held separately by each IEA member country, meaning technical and logistical constraints could slow the flow of barrels.
Molchanov estimated it could take 60 to 90 days before the oil meaningfully reaches the market, longer than traders hoping for immediate relief.