Dwindling Oil Reserves Leave Global Energy Markets Without a Shield
More than 100 days since the outbreak of the third Gulf war, global oil markets appear far calmer than many had predicted. Earlier this week, as fresh attacks between Iran and Israel rocked a fragile ceasefire, the price of Brent crude rose by only about 1%. Even after a series of new tensions involving the United States and Iran, Brent has hovered around US$93 per barrel, well below the intraday peak reached last April. This calm does not mean the market has overcome the supply disruption. The Strait of Hormuz, a vital artery for global energy trade, remains closed, removing approximately 15 million barrels of oil per day from the global market. This shortfall has been temporarily bridged through a combination of reduced consumption, increased production from several countries, and the draining of oil stocks held for emergency conditions.
China has slashed oil imports by about 5 million barrels per day compared to pre-war levels. In many other countries, austerity policies and consumption restrictions have curbed demand by a nearly equal amount. Simultaneously, producers such as Brazil and Venezuela have increased output to help fill some of the supply void. However, the biggest prop has come from Strategic Petroleum Reserves (SPRs). Last March, the 32 member countries of the International Energy Agency (IEA) agreed to release 400 million barrels of oil from government stocks, marking the largest stock release in the organisation’s history. Nearly half of that volume has now flowed into the market at a rate of 2.5 to 3 million barrels per day.
The problem is that room for manoeuvre is shrinking fast. Japan, which sourced about 90% of its oil needs from the Middle East at the start of the war, has been one of the most aggressive in releasing stocks. Kayrros data shows Tokyo began drawing down reserves even before the official IEA decision was announced. The Japanese government subsequently allocated approximately 90 million barrels, equivalent to 50 days of domestic consumption, most of which has now been channelled to refineries. Nonetheless, the pace of release has begun to slow. After briefly exceeding 1 million barrels per day, distribution fell to around 600,000 barrels per day last month. Japanese refineries have now managed to replace most of the supply that previously transited Hormuz with oil from the United States and other producers outside the Persian Gulf. This situation has made the government more cautious about draining remaining stocks. Japan still holds reserves above the IEA minimum of 90 days of consumption, but the uncertainty of the conflict makes the government reluctant to take excessive risks.
The United States faces a more complicated challenge. The country’s strategic petroleum reserve entered the war already significantly depleted following massive releases in 2022 and 2023 after Russia’s invasion of Ukraine. Although part of the 172 million barrel release commitment promised in March has yet to be fully delivered to the market, the volume of the US SPR is now at its lowest level since the 1980s. Washington has even started using an oil loan scheme rather than outright sales. Companies taking oil from government reserves are obliged to return the same volume plus a premium of between 17% and 26% in the 2027-2029 period. This scheme has dampened market interest; of four auctions conducted, three were undersubscribed, leaving around 45 million barrels of release quota still without buyers.
Technical constraints are also emerging. Most US oil reserves are stored in underground salt caverns in Texas and Louisiana. The lower the remaining oil volume, the greater the risk of damaging the storage facilities. One site, Bayou Choctaw, is reported to be nearly empty, while other facilities cannot increase pumping rates due to limited pipeline capacity. From a regulatory standpoint, the US SPR also has a minimum limit of around 150 million barrels, meaning the scope for additional releases is increasingly limited. Morgan Stanley estimates that stock releases from IEA member countries could drop sharply from around 2.5 million barrels per day in June to just 700,000 barrels per day in July.
The question then shifts to Europe. This region is relatively less dependent on Persian Gulf oil and has therefore been less enthusiastic about draining its strategic stocks. Most European reserves also consist of refined products such as petrol and diesel, not crude oil. Europe’s storage structure differs from that of America or Japan. Government reserves are scattered across commercial tanks rented by the state. Many analysts assess that only a small fraction of this oil has actually entered the market during the crisis. As a result, Europe has for several months been benefiting from other countries’ stock releases without having to drain its own reserves. The trouble is, the Northern Hemisphere summer is fast approaching. Fuel demand for travel is expected to rise just as releases from America and Japan are slowing. If European governments have to step in, they will face logistical challenges that have never been tested on this scale.
These conditions mean the oil market is entering a new phase. Global commercial stocks are projected to approach minimum operating levels by September. Thereafter, supply adjustments will increasingly depend on countries that still possess large reserves, notably China. Beijing actually has enough stocks to last for months, but the Chinese government also faces a dilemma. Draining reserves when the war shows no signs of ending leaves no cushion if supply lines are further disrupted or domestic demand surges.