By K Raveendran
Making one of the worst fears come true, Brent crude, the benchmark oil price, has hit an intimidating $110 a barrel as the Russian invasion of Ukraine is showing no signs of a possible resolution. This is the highest price for oil in more than seven years, which by itself should send shockwaves across the world. What is more alarming, however, is that attempts to arrest the price increase through coordinated action by the key players striving for energy stability in the world are not producing the desired results.
Crude prices continue to boil, despite the 31-member International Energy Agency (IEA) deciding in an extraordinary session on March 1 to release 60 million 60 million barrels of oil from their emergency reserves to send a strong message to global oil markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine.
IEA members hold emergency stockpiles of 1.5 billion barrels. The announcement of an initial release of 60 million barrels, or 4 percent of the stockpiles, is equivalent to 2 million barrels a day for 30 days. The coordinated drawdown is the fourth in the history of the IEA, which was created in 1974. Previous collective actions were taken in 2011, 2005 and 1991.
To make the situation all the worrisome, there have been reports of Russian president Vladimir Putin threatening to disrupt oil supplies to Europe and the rest of the world as a response to the European Union’s support to Ukraine as well as the coordinated sanctions against Russia by US and allies, which are already beginning to bite the Russian economy and the people.
Russia plays an outsized role on global energy markets. It is the world’s third largest oil producer and the largest exporter. The Russian exports of about 5 million barrels a day of crude oil represent roughly 12 percent of global trade, and its approximately 2.85 million barrels a day of petroleum products represent around 15 percent of global refined product trade. Around 60 percent of Russia’s oil exports go to Europe and another 20 percent to China.
IEA noted that the Russian comes against a backdrop of already tight global oil markets, heightened price volatility, commercial inventories that are at their lowest level since 2014, and a limited ability of producers to provide additional supply in the short term. Crude markets are manifestly in short supply, with a deficit of around 1.5 million barrels per day in January, as demand averaged 82.2 million bpd against supply of 80.7 million bpd. This spread is set to widen to more than 2 million bpd over summer.
The agency’s governing board resolved that energy supply should not be used as a means of political coercion nor as a threat to national and international security. Accordingly, it was decided that the IEA Secretariat will continue to closely monitor global oil and gas markets and to provide recommendations to the Governing Board, including possible additional emergency oil stock draws, as needed.
Of critical concern to IEA is Europe’s significant reliance on Russian natural gas and the need to reduce this by looking to other suppliers, including via LNG, and to continue to pursue a well-managed acceleration of clean energy transitions. The IEA Secretariat is scheduled to release a 10-point plan for how European countries can reduce their reliance on Russian gas supplies by next winter.
Most immediately at risk are the roughly 250,000 barrels per day of Russian oil exports transiting Ukraine via the southern branch of the Druzhba pipeline to supply Hungary, Slovakia and the Czech Republic. For the time being, these countries have ample government held emergency stocks to draw upon in case of need. But this does not remove the risks of supply disruption, which has prompted IEA to continue to monitor the market closely and assess the need for activating its emergency oil system.
Total oil stocks in IEA member countries amounted to close to 4.16 billion barrels as of end-December 2021, of which 1.5 billion barrels are held by governments as emergency reserves. IEA net-oil-importing countries have an obligation to hold emergency oil stocks equivalent to at least 90 days of their net oil imports. (IPA Service)