BREAKINGVIEWS-Energy shock will make hoarding the new normal

By Una Galani

HONG KONG, March 20 (Reuters Breakingviews) - The Middle East conflict will permanently alter how governments think about energy stockpiles. As countries converge on China's model of prioritising resilience over efficiency, national hoarding will become more common. It should keep demand and prices higher for longer.

The U.S. and Israel's war against Iran has exposed an extreme divergence in the extent to which import-dependent economies can cope with energy disruptions. Asia is the primary victim of the effective blockade of the Strait of Hormuz. Over 84% of the crude oil and condensate and 83% of liquefied natural gas that moved through the waterway in 2024 were delivered to Asian markets, including China, India, Japan and South Korea. It raises the question of how long the region can weather a prolonged supply disruption.

“Oil stockpiles are quite patchy. There isn’t necessarily a consistent pattern that explains why,” says Robin Mills, CEO of Dubai-based consultancy Qamar Energy and author of “The Myth of the Oil Crisis”. A lot of this, he says, comes down to government effectiveness, wealth and experience.

China has by far the biggest buffer, in absolute terms. Analysts estimate its emergency reserves at around 900 million to 1.3 billion barrels, sufficient for up to 120 days. That compares with 1.8 billion barrels of stockpiles and government-mandated reserves held by the 32 members of the International Energy Agency, which includes all major Western economies plus Japan, South Korea, Mexico and Turkey. That group, formed in response to the 1973 crude crisis, has now agreed to release 400 million barrels to get prices down. Brent crude hit $114 a barrel on Thursday.

For Australia, energy minister Chris Bowen says the stockpile is equivalent to just 30 days of average imported oil supply, which is only one-third of the IEA requirement and is also lower than the country's end-2025 figure. Meanwhile, India, like many South Asian countries, has paid a heavy price through past oil shocks and only has enough supply to cover 20 to 25 days of imports.

Relative to domestic consumption, Japan and South Korea's reserves are high, each with emergency and private-sector reserves sufficient to cover over 200 days of imports, but they depend on the Strait of Hormuz for a larger share of their total oil supply than China does.

Global stockpiles of gas – a fossil fuel used for power generation, cooking and making fertiliser – are minuscule by comparison. Japan said it held inventories equivalent to three weeks of total consumption following the shutdown of the world’s largest liquefied natural gas export plant in Qatar. In India, where households and small businesses rely on liquefied petroleum gas for cooking, canister prices are soaring on the black market, sparking panic-buying of instant foods and induction plates.

There are echoes of recent shocks. Global supply chains have been jolted repeatedly since 2020. Covid-19 closed factories and led to port bottlenecks. Russia’s invasion of Ukraine in 2022 hit liquefied natural gas, grain and fertiliser flows. These crises spurred ambitions for energy self-sufficiency, but high interest rates weighed on renewable investments and few imagined still bigger disruptions were possible. The world had not experienced a major gas supply shock before the Ukraine war. And even back in 2022, Qatar remained a reliable source.

So although China is the largest single recipient of Hormuz-bound oil, its large stocks coupled with diversified supply put it in a better position than most Asian countries. The People's Republic has access to overground pipelines from Russia and Kazakhstan. Unhappy with pricing terms Qatar offered in recent years, China also sought supplies elsewhere. “Put that all together and this crisis is problematic for China but much less so than for Japan, South Korea, India and so on,” Mills says.

China’s resilience comes at the cost of efficiency, however. Until the U.S. strikes on Iran, the top question for energy-market watchers was why Beijing kept buying oil it didn't immediately need. The black stuff was cheap immediately following the Covid shock, which suppressed global demand. It was even cheaper for China, which was willing and able to secure discounted supplies from U.S.-sanctioned producers like Russia, Iran and Venezuela. Beijing ramped up stockpiling following Donald Trump’s return as U.S. president, perhaps anticipating the fallout from deepening Sino-American tensions.

Among oil traders, another popular theory is that China is preparing for war. In such a scenario, the U.S. could potentially block the Strait of Malacca – near Thailand, Malaysia and Indonesia – which carries most of China’s oil imports. In other words, China's big buffers may be explained partly by fear of the cost of conflict and partly by access to sanctioned crude, neither of which applies to many other countries.

Strategic gas reserves are lacking for more practical reasons. Storing it requires cryogenic tanks. The fossil fuel also gradually evaporates, while keeping large, pressurised tanks overground isn’t very safe. Much of Europe’s storage capacity consists of aquifers and depleted gas fields – and stocks are largely designed to manage seasonal shifts in demand between summer and winter.

Japan and China partially address this problem by over-contracting gas and reselling excess supplies. But that’s potentially costly too. Until the Gulf crisis, markets expected liquefied natural gas prices to fall sharply over the next three or four years because of a glut of supply from the U.S. and Qatar.

The latest Middle East conflict will profoundly reshape energy markets. One analogy is the way that countries reacted to the freezing of $300 billion of Russian foreign-exchange reserves by the Group of Seven countries, the European Union and allies after the Ukraine invasion: trying to bypass the U.S. dollar system to settle trade has become an increasingly popular pastime. India, for example, doubled down on rupee-rouble mechanisms.

Similarly, the Iran war will nudge states to put resilience before efficiency, by building larger energy inventories. More countries will join China in ramping up stockpiles. For poorer governments with weak external finances, it will be a hard choice between holding foreign exchange reserves or commodities. Officials may also opt to use more domestic coal alongside renewables, given the difficulties of mitigating against gas supply shocks, Mills warns.

It all points to higher oil prices for the foreseeable future. Supply knocked offline by the war will take time to return, while IEA members will soon compete for barrels to rebuild their reserves, following the release. Stockpiles are inefficient and can only cushion temporary shocks, but they're far better than the alternative of running dry.

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