Last night, the 32 member countries of the International Energy Agency (IEA) jointly announced an agreement to release 400 million barrels of strategic petroleum reserves to address risks of global energy supply disruptions caused by conflict in the Middle East. The release of strategic petroleum reserves will be implemented in phases according to each member country's specific circumstances within an appropriate timeframe. This marks the sixth emergency reserve release directive issued by the IEA since its establishment in 1974, representing the largest scale in history, significantly exceeding the combined 182 million barrels released during the 2022 Russia-Ukraine conflict on two separate occasions.
Conventional logic suggests that supply-side releases should negatively impact crude oil prices, yet international oil prices only experienced a brief decline before quickly rebounding. Ultimately, Brent crude futures rose by 4.8% to settle at $91.98 per barrel, while U.S. WTI crude futures increased by 4.6% to close at $87.25 per barrel. Why did oil prices rise instead of fall after the reserve release? What aspects of the geopolitical situation should be monitored going forward?
Market Expectations and Short-Term Buffer First, expectations of the reserve release had already been gradually priced in by the market. Earlier this week, the G7 held an emergency meeting to discuss the possibility of a coordinated IEA reserve release, with some officials suggesting that a joint release of 300-400 million barrels would be appropriate. Consequently, following the announcement and the realization of this positive news, market sentiment reflected a "buy the rumor, sell the fact" pattern.
Second, regarding the volume and pace of the release, while it may provide a short-term buffer, its long-term impact appears limited. This coordinated release allows individual countries to execute reserve drawdowns autonomously based on their specific situations. The U.S. Department of Energy announced it would begin releasing 172 million barrels starting next week, with delivery expected to take approximately 120 days. Assuming other countries adopt a similar release pace, the daily release volume would be around 3.33 million barrels. According to Goldman Sachs data, prior to the conflict, daily oil flow through the Strait of Hormuz was approximately 20 million barrels. In comparison, the reserve release volume seems insufficient to address long-term supply issues.
Furthermore, as the conflict remains ongoing, market sentiment continues to find support. Despite claims that military actions are concluding, the current intensity of conflict has, in fact, escalated. The involved party has emphasized that previous "proportional retaliation" has ended and will now implement a strategy of "sequential strikes," abandoning a tit-for-tat approach. Any vessels belonging to the U.S., Israel, their partners, or carrying their oil cargoes are deemed "legitimate targets." With the conflict persisting, production cuts from an increasing number of oil fields and disruptions to Strait transportation mean that even with the IEA's reserve release, crude oil prices may struggle to return to pre-conflict levels in the short term.
Geopolitical Developments as the Core Variable 1. Statements vs. Actions: Focus on deeds, not words Recent statements from one side show a significant disconnect from the actual geopolitical situation, while the other has presented three conditions for ending the war that appear nearly impossible to meet. Each day the conflict continues, the loss of crude oil from production reductions and transportation disruptions impacts the price center and medium-to-long-term fundamental structure.
2. Transmission Logic: Refinery utilization reductions intensify As the foundation of the chemical industry and the core volatility factor in this geopolitical conflict, crude oil affects chemical raw material prices through cost transmission. Meanwhile, anticipated reductions in refinery utilization are becoming reality, causing substantive impacts on supply across various sectors. From a fundamental perspective on certain chemical products, the supply side is entering its traditional seasonal maintenance period in March, while the demand side may see activity during the peak spring season. Close attention should be paid to price transmission processes and actual end-demand performance.
3. Risk Management Remains Paramount With unpredictable geopolitical developments, market sentiment fluctuates accordingly. Current market conditions may contain numerous factors and noise that could impair judgment. Investors should maintain rationality, exercise caution regarding present market movements, and recognize the significant risks of chasing rallies or selling during declines. Continuous monitoring of positions and capital security is essential.