Asia's SPR bandwidth in spotlight as Russia-Ukraine conflict ignites oil

The dramatic escalation of conflict between Russia and Ukraine will put to test the readiness of Asia's strategic petroleum reserves in the event there is any supply disruption, but the region's staggering dependence on Middle Eastern supplies may limit the need to dip into reserves for now.

Analysts said Asia's importers may repeat their game plan of last year when they coordinated SPR oil release with Washington to cushion the shock from high prices rather than due to any supply hurdles.

"Among Asia's top oil-consuming countries of China, India, Japan and South Korea, China is relatively better-positioned as it has substantial domestic production, coupled with relatively high SPR levels," said Lim Jit Yang, adviser for oil markets at S&P Global Commodity Insights.

"Japan has the highest level of SPRs in Asia in terms of days of consumption covered, followed by South Korea, but both depend almost entirely on crude imports. India, on the other hand, is vulnerable in its own way as it depends heavily on imports and it has relatively low SPRs," Lim added.

Since the Russia-Ukraine conflict started, some Asian countries have said they were open to additional SPR releases if crude prices kept rising.

H.P.S. Ahuja, CEO of Indian Strategic Petroleum Reserves, told S&P Global Commodity Insights in the week starting Feb. 27 that India was keeping its options open to release oil either on its own or in coordination with other consumers from strategic reserves if the conflict pushes prices higher.

South Korea also made a similar statement.

"The Korean government has decided to promote additional release from the Strategic Petroleum Reserve to help stabilize the global energy market," the country's Ministry of Foreign Affairs said in a statement Feb. 28.

Need to tread cautiously

But when crude oil prices crossed $85/b last year, Asian oil importers worried this would derail a fragile economic recovery. As a result, for the first time countries like India and China turned to SPRs to cushion the impact of rising prices. The market witnessed coordinated SPR releases by Asian consumers, along with the US.

But with the escalating conflict threatening trade flows, market sources were unanimous in their view that Asian importers will be reluctant to release plentiful volumes just as a cushion for high prices. Rather, they will hold back a bigger portion for use only when there is a squeeze in cargo availability.

Analysts added that the real shortage would happen in the market if and when Russian oil and gas is put under sanctions. Until then there may not be a need for Asian consumers to dip into strategic reserves.

"The SWIFT ban is a significant piece of the overall package of sanctions slapped on Russia for its war on Ukraine. It is an irritant that will likely raise the cost of doing business for some Russian oil and gas companies," said Antoine Halff, adjunct senior research scholar at Columbia University's Center on Global Energy Policy.

"It alone will not sound the death knell for Russian oil exports. An outright ban on Russian oil and exports would have a far more punishing effect for Russia, but would also carry a heavier cost for Russian customers," he added.

Impact from coordinated response

The International Energy Agency has agreed to release 60 million barrels of oil in a coordinated effort in response, the agency said March 1. The US will release half of the total release, or 30 million barrels, from its SPRs.

Crude oil futures have continued their upward climb despite the announcement.

"We already forecast 430,000 b/d of net outflows from the US SPRs through April 30, and another 280,000 b/d during Q4 2022 from the next batch of Congressionally-mandated release in fiscal 2022/23 (Oct-Sept)," said Paul Sheldon, chief geopolitical analyst for S&P Global Commodity Insights.

"A near-term coordinated release could mirror June 2011, when a 1.4 million b/d disruption in Libya caused then President Barack Obama to order a 30 million barrel emergency release over two months, in conjunction with a similar amount from other IEA countries," he added.

Analysts added that as long as crude supplies from the Middle East is available to plug the gap, Asia may not have much to worry.

The Platts Brent-Dubai exchange of futures for swaps hit a record high of $13.60/b in early Asian trade March 3 -- allowing Asian refiners to favor more competitive Middle Eastern sour crude over other supplies priced against the European benchmark.

Some analysts, however, added that rising prices will remain a concern for Asia, even if there are no supply disruptions.

"Although ongoing geopolitical tensions between Russia-Ukraine can hurt Asia through multiple channels, such as tighter global financial conditions, elevated uncertainty and the risk of weaker global demand, higher commodity prices are the most important transmission channel," Nomura said in a note.