The closure of the Strait of Hormuz and the stranding of more than 10 million barrels per day (bpd) of crude oil in the Persian Gulf was a wake-up call for import-dependent countries to expand their capacity to hold strategic and commercial reserves.
Many countries, especially in the Asia Pacific, are looking to build new reserve capacity to boost their energy security and never again be caught off-guard by a massive supply disruption like the one triggered by the closure of the most important oil and LNG chokepoint.
From India to Australia, energy importers are looking to expand capacity to hold crude and fuel reserves to be better prepared for the next energy crisis, which, in this fragmented geopolitical situation, is a matter of when, rather than if.
Major oil producers are also considering expanding their global reserve sites to be able to sell their crude when the next flare-up closes a critical chokepoint.
The Role of Reserves in Oil Price Moves
Before the Iran war, few policymakers and analysts expected the Strait of Hormuz to ever become inaccessible for tanker traffic.
Oil importers had become complacent that, despite the tinderbox the Middle East has always been, the Strait of Hormuz has never been closed before.
But here we are now—nearly four months of stalled traffic and uncertainty about how fast and how smooth the reopening will be have resulted in an energy crisis in Asia, depleted the U.S. Strategic Petroleum Reserve (SPR) to a 1983 low, and pushed stocks at Cushing, the delivery point of WTI, to the operational-stress level of just 20 million barrels.
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Expanded reserve capacity could help cushion the blow in the next supply shock, whenever it occurs, softening the price spike impact in a future crisis.
On the other hand, expanded capacities will need hundreds of millions of barrels of crude and fuels to fill them, creating additional demand in the near to medium term and putting a floor under oil prices.
Storage Expansion Plans
India, Singapore, Australia, and Pakistan are all looking to boost their reserves capacities to avoid crises in the future. All storage plans aired in recent months could need about 500 million barrels of crude and fuels to fill the new capacities, according to Reuters calculations.
Furthermore, IEA member states will have to replace the 400 million barrels that were released in March, in the biggest coordinated oil stocks release in history. The need to restore the 400 million barrels in countries like the U.S. and Japan will also support demand. Even more barrels will be needed to reverse the current drawdown in global stocks amid peak summer demand, with inventories depleting despite the tentative reopening of the Strait of Hormuz.
All these needs to fill current and future storage sites could amount to about 1 billion barrels, spread over several years, per Reuters calculations. This will help global oil demand rebound from next year, assuming that the Strait of Hormuz traffic could normalize at some point in the second half of the year.
The first country moving to boost reserve capacity is India. Not an IEA member, it is the third-biggest crude oil importer. But unlike China, which has amassed more than 1 billion crude stocks, India’s underground Strategic Petroleum Reserve storage has a total capacity of 5.33 million metric tons of crude oil, equal to only 39 million barrels of crude oil, or just eight days’ worth of India’s oil consumption.
This one week of reserves laid bare India’s vulnerability during the Hormuz crisis. So the government has now reportedly asked state-owned Oil and Natural Gas Corp (ONGC) to build and fill a new site for strategic petroleum reserves, with an estimated investment of $1.6 billion.
Pakistan, for its part, is encouraging oil producers from the Persian Gulf to set up crude reserve buffers at a planned Energy City near the Gwadar Port.
“In case of emergencies like the breakout of war, Pakistan will have the first right to utilise the oil reserves,” a Pakistani official told local media in May.
Further east, Singapore, one of the world’s top oil hubs, said it would explore more underground spaces as options to increase its fuel reserves, Tan See Leng, Minister-in-charge of Energy and Science & Technology, said in April.
Australia, an IEA member but consistently failing to hold oil reserves equal to at least 90 days of its consumption, plans to spend AUS$10 billion, or US$7 billion, on building its fuel stock to avoid future supply squeezes.
During the current crisis, Australia turned to China for jet fuel supply as it was scrambling to ensure its fuel supply amid the global crunch, and one of its only two refineries was out of operation for months due to a fire.
Australia’s government now aims to establish a domestic fuel reserve through a minimum stockholding obligation and build additional storage capacity through the Boosting Australia’s Diesel Storage Program.
It’s not only importers that have vowed to increase storage capacity to minimize the impact of future crises.
The world’s top crude exporter, Saudi Arabia, is also considering expanding its global oil storage capacities, Aramco’s chairman Yasir Al-Rumayyan said last week.
Saudi oil giant Aramco has storage facilities globally, mainly in Asia, Al-Rumayyan said, adding, “We are thinking seriously of having larger storage facilities all over the world.”
By Tsvetana Paraskova for Oilprice.com
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