Panic in the oil market has calmed down, but wealthy nations still can't release enough crude in reserves to offset lost Middle East barrels

Panic in the oil market has calmed down, but wealthy nations still can't release enough crude in reserves to offset lost Middle East barrels.

Panic in the oil market has calmed down for now, with prices for crude pulling back from the week's highs near $120 a barrel over the past two trading sessions.

The world's wealthiest nations, known as the "Group of Seven," helped provide some ease to jittery markets by announcing plans to consider a coordinated release of emergency global crude reserves. The idea would be to make up for a historic loss of barrels of oil in the wake of the Iran conflict.

And late Tuesday, the Wall Street Journal reported the International Energy Agency has proposed the largest-ever release of oil reserves, exceeding the 182 million barrels released in 2002 after Russia's invasion of Ukraine. A vote by the agency's 32 countries is expected Wednesday, according to the report. Oil futures dropped after the report was published.

The scale of the disruption to global supplies is "unprecedented," analysts at Wood Mackenzie said in a note released Tuesday. "The industry has never faced a loss of supply volumes of this magnitude," they said, estimating that 15 million barrels of petroleum exports have been taken out of the global market.

While few details of any such planned release of reserves have yet to emerge, the hope of their arrival already has provided a degree of calm in markets. Oil prices have dropped more than 30% from Monday's intraday highs of close to $120 a barrel to Tuesday's intraday lows. That's the largest intraday peak to intraday low decline within two trading sessions since April 2020, according to Dow Jones Market Data.

On Tuesday, U.S. benchmark West Texas Intermediate prices (CL.1) settled at $83.45 a barrel, while global benchmark Brent crude (BRN00) finished at $87.80.

Furthermore, the retreat in oil prices comes despite the limits of any agreement to release oil from emergency reserves on the market. That's because that oil would not reach the market immediately, said Rebecca Babin, senior energy trader and managing director at CIBC Private Wealth. "It takes time to auction, load and physically move the barrels into the system."

There are also "practical limits on how quickly oil can be drawn down" from the reserves, Babin said. During the largest coordinated releases following the Russian invasion of Ukraine in 2022, the maximum flow rate effectively reached around 1.2 million barrels per day, said Babin. That's likely near the high end of what the market could expect again, she said.

By comparison, the Middle East disruption currently being discussed is significantly larger, she said, estimating it at roughly 16 million barrels per day. That's the amount that normally transits the Strait of Hormuz, one of the world's most critical maritime choke points for crude.

"Some flows are still moving, and others are being rerouted - primarily through Saudi Arabia's East-West pipeline and to a lesser extent via the UAE toward Fujairah - but the estimates I'm seeing suggest around 10 million barrels per day of flows are currently impacted or unable to move efficiently," said Babin.

The IEA's proposal to tap its reserves followed a discussion Monday by G-7 ministers who were considering a coordinated release of petroleum supplies with the IEA. Some U.S. officials would like to see a joint release of about 25% to 30% of the overall 1.2 billion barrels held by the IEA, or 300 million to 400 million barrels, one source told the Financial Times. That would mark the largest amount of oil released from reserves since the IEA's inception.

Line graph showing US Crude SPR inventory in millions of barrels from 1982 to 2024, with a significant decline in 2022.

Analysts at J.P. Morgan said the U.S., which is part of the G-7 and IEA, would likely supply the largest share of any release, with additional barrels from Japan, South Korea and European strategic stocks, according to a Tuesday note from J.P. Morgan.

Crude inventories in the U.S. Strategic Petroleum Reserve fell in 2022 with the release of 180 million barrels after Russia's invasion of Ukraine.

The amount of crude oil in the U.S. Strategic Petroleum Reserve now sits at about 416 million barrels, well below the reserve's full capacity of 727 million barrels, data from the U.S. Energy Department shows.

Trump said in early 2025 that he would refill the reserve "right to the top," but his tax-and-spending bill slashed funding for new crude purchases, according to the Wall Street Journal. Releases of the strategic reserve in the U.S. typically help in the short term, said CIBC's Babin, but not over the long term.

In the spring of 2022, the U.S. saw a historic release of 180 million barrels ordered by the Biden administration to help ease gasoline prices in the wake of Russia's invasion of Ukraine. In July of that year, the U.S. Treasury Department said that its analysis suggested that the U.S. release, along with a coordinated release of oil by IEA partners, lowered the price of gasoline by 17 cents to 42 cents a gallon.

Historically, the track record of effectiveness of such releases has been mixed, even if they improve "sentiment more than anything else," said Babin.

The U.S. strategic reserve has a maximum drawdown capability of 4.4 million barrels per day. However, analysts at J.P. Morgan said that given the low inventories, any release from the reserve, realistically, would likely be below the 1 million-barrel-per-day pace that it averaged in 2022.

J.P. Morgan estimated that a coordinated G-7 reserve release rate of about 1.2 million barrels per day from participating countries would be feasible. That would be "helpful," but the pace would not materially ease a 16 million barrel-per-day shortfall and would likely provide only "initial relief," while pre-escalation cargoes are still arriving. Once those shipments clear and new loadings fail to depart, a 1.2 million barrel-per-day release would be "insufficient" to counter potential losses, which it sees at around 12 million barrels per day within two weeks.

Line graph showing estimated supply shut-ins by day of Hormuz disruption, with "Realised" and "Cude volumes cuts, JPM forecasted" being lower than "Crude and products volumes cuts, JPM forecasted."

Trump said Monday that the U.S. would offer political risk insurance to tankers operating in the Persian Gulf and that the U.S. Navy offered to escort tankers through the Strait of Hormuz, if necessary. Despite an earlier report, the White House press secretary Karoline Leavitt said Tuesday the U.S. military has not yet escorted an American tanker through the strait. But the U.S. military was drawing up additional options following the president's directive to continue keeping the strait open, she said.

When the conflict ends, "cranking up the supply chain won't be swift," Simon Flowers, chairman and chief analyst at Wood Mackenzie, said in a note. "Product barrels in storage at refineries or in port might be moved on vessels quite quickly," he said. "But if wells are shut-in for a prolonged period, restarting production to full output could take weeks or even longer."

Ultimately, analysts said more reliable passage of oil tankers through the Strait of Hormuz would be the best solution to tame crude-oil prices.

Certain measures can "buy the market time and provide short-term relief," CIBC's Babin told MarketWatch, "but they do not resolve the core issue."

The real solution for stabilizing the oil market "ultimately comes down to restore reliable flows through the Strait of Hormuz," she said.