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Release of strategic reserves, a real armor?

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Release of strategic reserves, a real armor? By Rubí Alvarado General Manager, Energy Capital Magazine

To help compensate for the Russian oil shortage following the sanctions imposed on Moscow for the invasion of Ukraine, the member countries of the International Energy Association (IEA), including the United States, will release 240 million barrels of oil in the next six months.

At first glance, this maneuver seems like the right bet to shield the oil market from the absence of a significant percentage of the Russian supply. In the experts’ view, the IEA’s further release of emergency oil reserves reduces the risk of a large supply shortfall; which would cause major economic disruption.

However, the experts’ approach could be wrong since they only see the glass as half-full when it is actually getting empty.

In early April, Russian oil production fell by 700,000 barrels per day; and in the middle of the month, it reached a decline of 1.5 million barrels per day. Sanctions for May are expected to curb 3 million barrels per day.

However, in the third week of April, the European Commission (EC) was working on a document to prohibit purchases of Russian oil more strongly. The sanction would contemplate a total embargo of more than 4 million barrels per day.

This occurs in a context where commercial inventories are at their lowest level since 2014. Also, with a limited capacity of oil producers (OPEC and its allies) to provide additional supply in the short term.

Not enough barrels

In addition, considering that the 240 million barrels will be distributed in the next 180 days, starting in May; the additional supply points to 1.33 million barrels per day. That amount is insufficient to compensate for the absence of 4 million barrels that Moscow will stop supplying in May; mainly to Europe.

If Pythagoras is not mistaken, the market – mainly European – will begin to lack nearly 3 million barrels per day as of May; a deficit that, as the days go by, could worsen and generate an unprecedented energy crisis.

Similarly, oil prices could climb to $200 a barrel; posing a serious threat to global economic prospects, including a new deflation: Expensive raw materials in the midst of a recession. So, is the release of strategic reserves effective?

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