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U.S. Stockpile of Oil Nears Target Level

The government expects to stop adding to the reserve in August, returning 75,000 barrels a day to the market.

June 08, 2005|From Associated Press

The United States' emergency fuel tank -- the Strategic Petroleum Reserve -- is months away from reaching its target amount of crude oil.

The milestone is significant because it gives the country a larger energy-security blanket than ever to call upon in the event of a supply disruption. But the stockpiling of 700 million barrels of oil, which is scheduled for completion by the end of August, also could bring some immediate relief to the global energy market, analysts say.

When the Energy Department reaches the 700-million-barrel target set by President Bush in 2001 for the reserve, which is stored in underground salt caverns along the Gulf Coast in Texas and Louisiana, roughly 75,000 barrels of oil a day that has been going into the reserve will become available for commercial purposes.

Oil analyst Jim Burkhard of Cambridge Energy Research Associates in Cambridge, Mass., said, "It will add to an overall trend of softening demand growth."

But the amount being pumped into the reserve amounts to less than 0.1% of average worldwide demand of about 84 million barrels a day. As a result, the disappearance of the strategic reserve's demand is likely to go unnoticed on world markets, said Lawrence J. Goldstein, president of PIRA Energy Group in New York.

"We're talking about nickels and dimes," he said. Nonetheless, he added, the Organization of the Petroleum Exporting Countries might rein in production slightly to avoid an effect on prices.

Even Burkhard cautioned that in spite of slowing economic growth in 2005, global oil demand is expected to grow this year by 1.8 million barrels a day -- consumption that should keep prices at elevated levels given the world's supply tightness.

On Tuesday, light sweet crude futures settled at $53.76 a barrel, down 73 cents.

The U.S. Energy Information Administration on Tuesday revised upward its estimate for the average U.S. oil price in the third quarter to $52.83 a barrel from its previous estimate of $51.58.

In its latest weekly petroleum supply report, the Energy Department said the strategic reserve contained 693.3 million barrels, up from 660.8 million a year ago.

The oil pumped into the strategic reserve comes from petroleum producers in lieu of royalties they must pay the government for operating on federally leased lands. Once the inflow is halted, those royalties will flow to the government at an estimated rate of more than $80 million a month, assuming a value of about $38 a barrel for the sour crude the government had been stockpiling.

Regardless of whether prices ease once the stockpiling stops, the end of the process will put to rest for now a debate about whether the Bush administration's policy of filling the reserve almost to the brim amid record-high oil prices was a good one.

Critics, including Sen. Charles E. Schumer (D-N.Y.) and the Air Transport Assn. of America Inc., an airline industry trade group, said the policy exacerbated the problem of high fuel prices and called for it to end.

The Bush administration countered that it would not use the strategic reserve as a tool to nudge prices. Supporters said so little was going into the reserve that it wasn't having that large an effect on the market anyway.

The upcoming lull in filling the strategic reserve, whose total capacity was recently revised upward to 727 million barrels, is likely to be short-lived.

Congress may expand the reserve's capacity by an additional 300 million barrels as part of broader energy legislation.

But even if Congress decides to expand the reserve, it could be many months before additional barrels are socked away, since the Energy Department would have to buy more salt caverns and then prepare them for crude oil storage.

PIRA Energy Group's Goldstein said it was important to expand the reserve because as the country's demand and dependence on imports rise, the U.S. is becoming more vulnerable to output disruptions.

"Now when something goes wrong, the price of oil moves not by nickels and dimes, but by dollars," Goldstein said.

With U.S. oil imports exceeding 10 million barrels a day, the reserve theoretically holds an amount of fuel equal to more than two months of imports.

The maximum drawdown capacity of the reserve, however, is 4.3 million barrels a day, according to the government, which amounts to 27% of the daily input to refineries in the United States.

Reuters was used in compiling this report.

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