JPMorgan says G7's 100 million barrel release is mostly repackaged old barrels

The G7's announcement last Friday of a 100-million-barrel crude and diesel release from emergency stockpiles over four months initially seemed a strong move against record diesel costs. However, according to JPMorgan's commodities desk, that headline figure may not be as significant as it appears.

In a research note this week called "Counted but not delivered," Natasha Kaneva and her team said the plan specifically includes earlier pledges already carried out, and in their view, "does not represent 100 million barrels of new intervention."

Here is the arithmetic: IEA member countries pledged 412 million barrels in March. Around 321 million have already been released, leaving about 91 million still due. So Friday's announcement largely represented the finishing of the March plan, which includes the outstanding 40 million barrels from the US Strategic Petroleum Reserve that are already lined up to be delivered by December. The novelty lies in the focus on diesel, with a significant front-loading in the initial 20 days.

Many details remain unresolved. The G7 did not specify the breakdown between crude and refined products, nor which nations will contribute. Earlier discussions had considered a 50/50 split. The specifics are expected at the IEA governing board meeting scheduled for October 14-15.

The biggest factor is Europe:

• European nations' March commitment was 108 million barrels: 34 million crude, 73 million products.
• JPMorgan calculates that actual releases have been only around 16 million barrels of diesel, 17 million of gasoline, 10 million of fuel oil, and 12 million of other products.
• Hardly any European crude seems to have been put into the market.
• Europe's emergency diesel stocks total about 377 million barrels, more than three times the 106 million barrels in the US.
• Germany with 64 million barrels and France with 61 million individually exceed the entire US diesel stockpile.
• Despite this, both Europe and the US have each only released around 16 million barrels of diesel since the start of the war.

In the meantime, the US has taken on the larger role via the transatlantic arbitrage. American diesel flows to Europe rose from 200-250 kbd pre-war to about 400 kbd in July and nearly 500 kbd in August, depleting US supplies.

Regarding worldwide crude inventories, the complete 100-million-barrel release would reduce stocks from approximately 7.9 billion barrels to 7.8 billion by January. That would be the lowest in a decade, yet still about 150 million barrels above JPMorgan's stress level. The situation for diesel is more acute. OECD diesel stockpiles would drop to roughly 504 million barrels, a 20-year low and beneath the bank's 529 million stress threshold. That translates to about 39 days of supply cover, marginally under the September 2022 trough of 40 days.

Should Europe absorb around 40 million barrels of the diesel release and distribute it over 60 days, that would amount to about 660 kbd, equating to roughly 57% of Europe's current diesel imports. Such a move would likely alleviate near-term tightness and shrink the arbitrage spread.

The report concludes with an apt observation: "the constraint is not the availability of emergency barrels, but governments' willingness to deploy them."

Separately, Donald Trump stated that a "big announcement" concerning diesel is forthcoming, hinting at the October 14-15 gathering.