Bloomberg News

‘Head-Scratcher’ Petroleum Release to Swell U.S. Crude Glut

June 23, 2011

(Adds companies that purchased oil from the strategic reserve after Hurricane Katrina in eighth paragraph.)

June 23 (Bloomberg) -- Oil producers tumbled the most in more than a year after the U.S. government announced plans to pour as much as 1 million barrels of stockpiled crude a day into an already-glutted market.

The U.S. and 27 other nations pledged today to tap government-controlled oil inventories after to civil war in Libya disrupted shipments and Saudi Arabia failed to persuade fellow members of the Organization of Petroleum Exporting Countries to plug the gap with increased output. Crude futures plunged more than $5 a barrel in New York trading.

The U.S. plans to make 30 million barrels available from the Strategic Petroleum Reserve over the next 30 days as part of a coordinated effort by International Energy Agency member states, according to the Energy Department in Washington. The other 27 IEA countries will collectively release an equal amount of crude during the same period.

The supply addition comes at a time when refiners in the world’s biggest economy have more crude on hand and are importing less as demand for fuels such as gasoline and diesel is slipping, according to Energy Department figures. The National Petrochemical and Refiner’s Association criticized the decision to tap the strategic reserve as a political move that “makes no sense” and “will do nothing to benefit consumers.”

“This is kind of a head-scratcher because we’re just not in a situation in the U.S. where we physically need more barrels to meet demand,” Blake Fernandez, an energy analyst at Howard Weil in New Orleans, said in a telephone interview. “This looks more like a perception move by the U.S. government and the Europeans to alleviate high crude prices.”

Third Release

A Standard & Poor’s oil-industry index that includes Exxon Mobil Corp. and ConocoPhillips fell as much 3.5 percent in the first 45 minutes after the Paris-based IEA’s announcement, the biggest drop since June 4, 2010. Marathon Oil Corp., based in Houston, and San Ramon, California-based Chevron were the biggest losers in the seven-member index at 2:42 p.m. in New York Stock Exchange composite trading.

IEA members have conducted coordinated releases of emergency stockpiles on two other occasions since the group was founded in 1974. The first was during the 1991 Persian Gulf War; the second was in the aftermath of Hurricane Katrina, which slammed into U.S. refineries and offshore oil platforms in 2005.

BP Plc, Marathon, Royal Dutch Shell Plc, Vitol SA and Astra Oil Co. bought crude from the strategic reserves after Katrina shut some offshore wells and closed import terminals. The companies paid an average of $64 a barrel for the oil, the Energy Department said in Sept. 2005.

West Texas Intermediate crude futures fell $4.29, or 4.5 percent, to $91.12 a barrel on the New York Mercantile Exchange at 2:41 p.m. Earlier, the contract dropped as much as $5.72, or 6 percent. Before today, the futures had gained 24 percent in the past year.

Producers’ Profits

The decision to tap stockpiles will comfort European leaders apprehensive that debt crises in Greece, Portugal and Ireland may portend a continent-wide economic contraction, said Eliecer Palacios, an energy specialist at Maxim Group LLC in New York. Although profits for oil producers will be reduced by lower crude prices, even companies exploring the most expensive deep-water and shale prospects still will make plenty of money, he said.

“Everyone will be happy even if oil falls to $75” a barrel, Palacios said in a telephone interview. “There will be a short-term impact on the equities based solely on the perception of lower prices but nothing fundamentally has changed. We saw a nice rally on the Libyan disruption and now that risk premium is being removed.”

‘Reactionary Move’

Karen Matusic, a spokeswoman for Exxon Mobil Corp., the world’s biggest oil refiner, declined to comment on whether the company plans to request any supplies from the strategic reserve. Chevron and Shell also declined through spokesmen to discuss their crude needs or attitudes toward the availability of strategic stockpiles.

“This is a reactionary move based on failed energy policy by this administration,” the American Petroleum Institute, which represents about 400 producers, said in an e-mailed statement. “We need a long-term solution that focuses on more development here at home that would improve our energy security, generate revenue for our government and create American jobs.”

Storage tanks used by oil producers at the crude-trading hub in Cushing, Oklahoma, held 38 million barrels as of June 17, 41 percent above the five-year average for this time of year, according to Energy Department figures. Stockpiles at Cushing reached 41.9 million barrels in April, the highest point since at least 2004, when the Energy Department began tracking the figures.

U.S. crude imports are almost 10 percent lower than a year ago. Refiners brought 9.15 million barrels a day of oil into U.S. ports last week, down 9.5 percent from the same week in 2010, according to Energy Department data. Demand for foreign crude in the world’s largest economy dipped to a 24-month low of 7.69 million barrels a day in December.

“This action today will do nothing to benefit consumers,” Charles Drevna, president of the National Petrochemical & Refiners Association, said in a statement. “Instead, it leaves our nation vulnerable if hurricanes, other natural disasters or a foreign crisis causes a real supply shortage.”

--With assistance from Tara Patel in Paris, Grant Smith in London and Aaron Clark in New York. Editors: Jessica Resnick- Ault, Susan Warren

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus