In the end, the rumored pre-election release in mid-September of U.S. strategic oil reserves, aimed at easing high gasoline prices, never materialized. But if the tense political backdrop in the Middle East escalates, many believe supply threats will return to the fore, sending the price of benchmark Brent crude oil past $120 a barrel and renewing calls for a release of emergency supplies.
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A move in U.S. retail gasoline past $4.00 a gallon would also represent "the trigger for words and pressure by the Saudis and U.S. government" to act and bring more oil to the market, said Fereidun Fesharaki, chairman of FACTS Global Energy (FGE) an energy consultancy and a former energy adviser to the Prime Minister of Iran in the 1970s. "It has to be coordinated and U.S. will not act alone."
But Dominic Schnider, global head of commodity research at UBS Wealth Management, highlighted high production rates from swing producer Saudi Arabia as a key factor which would cushion the blow from potential supply disruptions, lessening the chance of a release from the Strategic Petroleum Reserve (SPR).
"If prices I would say go back to $120 or even higher, then Washington could be inclined to really release some SPR," Schnider said. "But Saudi Arabia is really willing to provide more crude and bring prices down…I think they can achieve it in the fourth quarter. So the SPR is not a topic for me at the moment."
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The majority of the oil market and industry agree. Eighteen out of 24 traders, analysts and strategists surveyed by CNBC believe a supply shock can be averted by draining well-stocked global inventories.
Still, global markets this year have had to contend with numerous supply disruption scenarios from the Middle East, primarily led by threats by Iran to blockade the Strait of Hormuz – the transit route for about 40 percent of the world's seaborne oil exports — if its uranium enrichment program was targeted by a military strike by Israel or the U.S.
With the exception of about 1 million barrels a day of Iranian oil exports effectively quarantined from world markets by sanctions, there have been few major physical dislocations. Still, the fear alone of a supply crunch has been enough to keep markets on edge though the effect has been limited by well-stocked global inventories.
"Since mid-June the price of Brent has risen from around $90 a barrel back into the $110-120 range which it has occupied for most of the past 18 months," said Alastair Newton, senior political analyst at Nomura in a report on November. 1. "This sharp increase appears to have been driven primarily by a perceived increase in geopolitical risk, accounting for a premium of perhaps $15-$20."
Israel Election
The next major risk event determining the risk premium, and the possibility of a release of SPR oil, could be the result of Israel's election, scheduled for January 22, 2013.
"We have consistently taken the view that, if absolutely necessary, Israel would launch a military strike to try to prevent or slow down an Iranian nuclear weapon," Nomura's Newton said. "However, we continue to believe that Prime Minister Binyamin Netanyahu is unlikely to order a strike before the next Israeli election. Furthermore, although the probability of a strike – and market concerns – may rise immediately thereafter, we still see 2013 second-half as a more likely window than the first-half."
Military action against Iran could cause a Strait of Hormuz shutdown – a "low-probability scenario" that would send oil "soaring to $150 or higher," wrote Societe Generale oil strategist Mike Wittner in the bank's 2013 market outlook published September 12. Fifteen million barrels a day of crude oil exports would be temporarily lost, Societe Generale estimated. An SPR release could occur at $115/a barrel Brent but would be more likely at $120, Wittner said.
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Strategic government stockpiles of crude and refined products mandated by the International Energy Agency (IEA) stand at 1.5 billion barrels and are mainly located in the U.S., Germany and Japan while commercial stocks of crude and products are estimated at 2.7 billion barrels, according to Societe Generale.
"If necessary we are there to act" in event of major supply disruption, IEA Executive Director Maria van der Hoeven told CNBC at the sidelines of the Singapore International Energy Week last month. Van der Hoeven also said the boom in unconventional sources of oil and gas in the U.S. had helped advance self-sufficiency, reducing the reliance of the world's top energy consumer on Gulf imports.
U.S. energy import dependency has been "lowered a lot," she said, adding more export licenses were being issued.
The IEA last authorized the release of strategic oil on June 23, 2011 when its 28 member countries agreed to tap 60 million barrels from emergency stocks in response to supply disruption from Libya.
The release had an immediate impact on both outright prices and spreads, according to a Reuters report at the time. Spot Brent prices fell $7 on the day of the announcement, equivalent to a reduction of around 6 percent. Premiums for the soon-to-expire August, September, October and November Brent futures contracts were crushed as fears about near-term supply shortages of light sweet crudes eased, Reuters said.
But within weeks both the spot price drop and the contraction in spreads proved temporary. Still, IEA Deputy Executive Director Richard Jones argued that the coordinated action by IEA members "played at least a partial role in helping avoid a damaging price spike during summer 2011."
The 30 million barrels released by the U.S. and another 30 million made available by other countries was equivalent to 46 days' worth of Libyan exports or 67 days output from the North Sea Brent, Forties, Oseberg and Ekofisk (BFOE) crude streams deliverable against the Brent contract.
But it represented less than 1 day of global oil consumption (around 90 million barrels) and boosted combined OECD commercial stocks of crude and products by less than 2 percent (before the release they stood at a massive 2.677 billion barrels).
'On the Table'
John Kilduff, founding partner of Again Capital, said that if supply was curtailed again the U.S. may "offer out the equivalent of 1-1.5 million barrels per day" from emergency stockpiles.
"Market reaction to mere speculation of release has been significant," Kilduff said. "I would expect prices to fall $5 to $7 per barrel, with more downside, if more barrels look likely or if the move is seen as enough to change market sentiment that any shortfalls will be filled by SPR barrels. Overall, global, coordinated releases of SPR barrels can be effective in mitigating upside price spikes."
Whether or not to release strategic oil in response to a jump in prices that some argue may be driven by speculative market activity has been a controversial point. White House Spokesman Josh Earnest said on August 17 that tapping the SPR was "an option that is on the table." The Obama administration has drawn fire from its opponents for keeping the door open to a release of SPR oil after gasoline prices closed in on $3.80 a barrel earlier this year.
"Our understanding is the reserves are held for strategic purposes, with the intent that they be released in times of crisis or substantive actual supply shortage," said a senior executive with a European oil major. "The volumes in reserves are not sufficient to impact prices for any significant period of time, given the high relative materiality of daily production and traded volumes."
The Energy Department released fuel from the northeast heating oil reserve on November 3 to help Hurricane Sandy recovery efforts. The release included diesel fuel for emergency equipment and buildings, including electrical generators, water pumps, trucks and other vehicles. Two million gallons of fuel was released initially, but the Energy Department will make more available as needed.
—By CNBC's Sri Jegarajah