Oil prices plummeted after news that the IEA proposed a release of oil reserves
The International Energy Agency (IEA) proposed the largest oil reserve release in history due to potential supply disruptions from the US-Israel-Iran conflict. News of the IEA's proposal put downward pressure on market sentiment, and oil prices fell further on Wednesday.
Brent futures traded down 88 cents, or 1%, at $86.92 a barrel as of 04:51 GMT. WTI crude oil traded down 35 cents, or 0.4%, at $83.1 a barrel.
US crude oil prices jumped 5% at the market open after both contracts fell more than 11% on Tuesday; this was the sharpest percentage drop since 2022, a day after Trump predicted a swift end to the war. On Monday, WTI oil surged above $119 per barrel, reaching its highest level since June 2022.
The IEA's proposed stock reduction will exceed the 182 million barrels of oil that IEA member states released in two separate phases in 2022, when Russia launched its full-scale invasion of Ukraine.
A stock reduction of this magnitude would likely compensate for a 12-day disruption to Gulf exports of an estimated 15.4 million barrels per day.
Despite all these developments, the US and Israel bombed Iran on Tuesday in what the Pentagon and Iranians described as the most intense airstrikes of the war. The US Central Command announced on Tuesday that 16 Iranian mine-laying vessels had been destroyed near the Strait of Hormuz.
Trump has repeatedly stated that the US is prepared to escort tankers through the Strait of Hormuz if needed. However, sources indicate that requests for military escort from the shipping industry are being rejected due to the very high risk of attacks on the US Navy.
Meanwhile, oil prices continued to normalize in a volatile manner after Monday's sharp rise. Developments in the Middle East are being closely watched as investors assess how long energy prices can remain high.
The question is whether to take profits by selling at a high price or to wait and benefit from a higher price advantage.
G7 officials met online to discuss the potential release of emergency oil reserves to mitigate market shock.
French President Emmanuel Macron will hold a video call with other G7 leaders on Wednesday to discuss the impact of the conflict in the Middle East on energy and measures to address the situation.
Despite everything, some analysts are skeptical of the IEA's proposal. No official release announcement has yet been made, and doubts remain about the ultimate speed of any withdrawal from these reserves. The key issue is not the size of the reserves, but the achievable withdrawal rates.
According to a source, Abu Dhabi state oil giant ADNOC shut down its Ruwais refinery in response to a fire at a facility within the complex following a drone strike, a consequence of the US-Israeli war against Iran affecting energy infrastructure.
Saudi Arabia, the world's largest oil exporter, is trying to increase supply via the Red Sea, but shipping data shows that this amount falls far short of what is needed to offset the decline in flows through the Strait of Hormuz.
Relying on the port of Yanbu on the Red Sea to increase exports is unrealistic, especially with neighboring countries Iraq, Kuwait, and the United Arab Emirates already reducing production.
In reality, Gulf oil and petroleum product supply has currently decreased by approximately 15 million barrels per day, a capacity that could drive crude oil prices to $150 per barrel. Unfortunately, even a quick fix would likely lead to disruptions to energy markets lasting weeks.
According to American Petroleum Institute (API) figures released on Tuesday, U.S. crude oil, gasoline, and distillate inventories fell last week.
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