Why strategic oil reserve refills will take ‘a lot of time’ after Iran deal

If the Strait of Hormuz reopens following the signing of the Iran peace deal on Friday, experts say it will still take some time to replenish the world’s strategic oil stockpiles.

The longer it takes to rebuild those stockpiles, the greater the risk of an oil shortage if another geopolitical shock requires extra oil released to market.

“The fundamentals of the oil market haven’t shifted all that much whether this deal was signed yesterday or in two weeks from now. The oil market is [currently] under-supplied,” says economist Marc Ercolao at TD Economics.

“It’s going to take a lot of time to get that back.”

Strategically stocked oil is referred to by industries and markets as Strategic Petroleum Reserves (SPR), and many countries maintain a certain amount of oil in these storage facilities in case of unexpected supply shortages.

“[SPRs] are intended to help meet global demand in a time where current or normal sources of supply aren’t working as well. Now, that implies that there is demand and usually demand will lead to higher prices,” says Ercolao.

The International Energy Agency (IEA) requires its 32 member countries to maintain minimum emergency oil reserve equal to 90 days of net crude oil and petroleum product imports.

Although Canada is a member of the IEA, it is also the only G7 nation that does not have a government mandated strategic stockpile. That’s mainly because the country is a net exporter of crude oil.

Regardless of the exemption, Conservative Leader Pierre Poilievre called on Ottawa to mandate a strategic reserve as an extra layer of insurance in the wake of the Iran war. At the time, he said, “our stockpiles are at zero.”

Although China has the largest strategic reserve in the world, it is not a full member of the IEA, which means the U.S. has the largest strategic reserve stockpile of all IEA member countries.

And the U.S. is reportedly seeing their strategic reserves running low.

“In order to sustain ourselves over the last four months, we’ve been dipping into the reserves that we normally hold on to in case of emergencies. And that’s exactly what they’re there for. But the thing is that those reserves have started to slowly run out,” says economics professor Moshe Lander of Concordia University.

“We haven’t actually reached a point yet where oil has run out but it was getting dangerously close.”

Earlier this week, the U.S. Department of Energy said stocks of crude oil in the U.S. strategic petroleum reserves fell to 340.3 million barrels, the lowest level since 1983.

That’s less than half the capacity of just over 700 million barrels, according to the U.S. Energy Information Administration.

Part of the drawdown is because the United States agreed in March to contribute about 170 million barrels of crude oil from its strategic reserves for the IEA-coordinated release of 400 million barrels along with other member countries to help calm oil markets.

If the Strait of Hormuz reopens, there will likely be a flood oil heading to global markets, which means the U.S. may be able to reduce, or stop dipping into its strategic reserve to help with the shortfall left from the strait being closed for several months.

But it’s going to take several more months for things to catch up. That’s because cargo ships move very slowly, and facilities and infrastructure that were damaged during the conflict need to be repaired.

Until oil markets normalize, demand for it will likely remain high, which may mean leaning even more on strategic reserve supplies.

Higher demand for oil typically raises the price, which means consumers and businesses alike could be paying elevated prices for fuel and other products for some time.

“If we’re looking at global strategic reserves, those have been drawn down quite significantly, but we wouldn’t say they’re at alarming levels just yet. But if we narrow in on the U.S., who is the biggest member of this strategic reserve release program, just recently they’ve drawn down their reserves to levels not seen since 1983,” says Ercolao.

“At some point, these barrels will need to be refilled, so that the price relief we’re seeing now could get tighter. Once the U.S. or any country is back in the market to lift their barrel count in their strategic reserves.”

Ercolao says U.S. reserves are on track to reach more critical levels by next month, and that comes at a time of peak demand during the summer travel season, which means more fuel is expected to be consumed for automotive and aviation transportation.

Markets like the U.S. may be able to sustain demand for oil if their strategic reserves run out by producing and importing more as needed, but not having enough strategic reserve comes with added risk if there’s another geopolitical shock, or if the fragile peace agreement between the U.S. and Iran unravels.

“The U.S. is carrying 40 to 50 per cent of the whole [SPR] program. Relative to history and relative to where they should keep levels at, it’s at its lowest point, or one of its lowest points,” says Ercolao.

“The issue with that is that it leaves less buffer, less room to respond to future shocks.”