Ukraine: Four things to know about strategic oil reserves

Millions of US barrels will pour into oil markets in the coming months. The United States will indeed once again draw on their strategic reserves to the tune of one million barrels per day. A massive effort that could be followed by their allies, members of the International Energy Agency (IEA).

Objective: to relieve tensions in an unbalanced oil market. The fundamentals have driven prices up in recent months with a barrel that is currently holding around 100 dollars but which could climb to 150 or even 200 dollars in the coming months according to experts. A surge and volatility fueled by the war in Ukraine and its impact on supply, particularly Russian. In this context, brandishing the weapon of strategic reserves is a strategic choice with no guarantee of success. Explanations.

1. What are strategic reserves?

Strategic oil reserves are reserves of crude constituted by States to deal with exceptional situations, such as shortages or a sharp rise in prices, which could represent a threat to national economies. The rules governing these emergency stocks, initially constituted for military reasons, were reinforced within the countries consuming crude oil after the crisis of the Suez Canal in the 1950s, which led to a drop in the flow of oil. They will be further strengthened after the oil embargo of 1973-1974.

After this shock, the main consumers, led by the United States, decided to coordinate their efforts through their membership of the IEA. This imposes a common rule on them: the obligation to have oil stock levels equivalent to at least 90 days of net imports.

In Europe, this 90-day rule is included in a directive dating from 2009 . “Member States shall take all measures to ensure the maintenance for their benefit of a total level of oil stocks equivalent to at least the greater of the quantities represented either by 90 days of net average daily imports, or by 61 days of average daily domestic consumption”, specifies the text.

2. Who holds the largest strategic reserves?

In terms of total capacity, the US Strategic Petroleum Reserve (RSP) is the largest in the world. It is designed to hold up to 714 million barrels of crude oil, spread across four storage sites along the Gulf of Mexico, where much of the country’s oil refining capacity is located.

In recent years, however, the stocks that make up these reserves have continued to decline. After peaking at 707 million barrels in 2008, they have now fallen to 568 million barrels, according to the latest count from the US Department of Energy (EIA).

France, for its part, has some 18 million tonnes of oil equivalent to 29.5% of releases for consumption the previous year. This crude is managed by the public limited company for the management of security stocks (Sagess), which represents the oil operators on whom this storage obligation is imposed. It is stored in depots distributed throughout the territory.

3. Who makes the decision to draw on these reserves?

It is the public authorities who decide to draw on these stocks as soon as they consider that the situation requires it. In the United States, recourse to strategic reserves is decided in the event of a “serious interruption of energy supply” likely to have “a major negative impact on national security or the national economy”. George Bush Sr. used it during the first Gulf War in 1991, his son in 2005 after Hurricane Katrina and Barack Obama in 2011 when the civil war in Libya pushed prices up.

Last November, Joe Biden made reference to galloping inflation to justify his decision to draw 50 million barrels from his strategic reserves. Today he evokes the war in Ukraine and its consequences (including the embargo on Russian hydrocarbons) to announce a new use of these reserves.

The AIE can also encourage its members to act in this direction. “In the event of a severe disruption to the oil supply, IEA members may decide to release these stocks to the market as part of collective action,” the agency explains. This was done last November (with the support of China). However, the approach is exceptional. The coordinated action launched last fall was only the fourth of its kind since the strategic reserves were set up under the agency’s supervision.

In France, the government reminded the Senate in 2016 that these strategic stocks, “intended primarily to deal with an international crisis”, could be called upon “during national or even local difficulties”. This is how this same year 2016, when the demonstrations against the Labor law led to blockages of refineries, the decision was taken to draw on reserves in order to avoid fuel shortages.

4. Tapping into reserves to lower oil prices, does it work?

It all depends on the scale of the action. Last November, the markets reacted very little (Brent prices even rose after the announcement). The announced millions of barrels constituted only a small fraction of the oil consumed in the world and the news had been anticipated.

This time, oil markets fell after news of a new US action came out, losing another 5%. But not sure that this is enough to lower prices over time, experts say. “A possible release of crude from the strategic petroleum reserve would help the market to rebalance this year, but it will not solve a structural deficit for oil”, judge thus the economists of Goldman Sachs. This decision will even be “probably insignificant”, believes Victor Shum of S&P Global, with the focus still being on Russian exports whose losses may not be compensated.

For observers, the American strategy is above all political. It aims to send a message to the OPEC cartel and its allies, including Russia, the only real price makers on the oil markets. Meeting again on Thursday, the latter should also still maintain their strategy of limiting the total increase in their production to 400,000 barrels per day.

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