Oil Prices Plunge as US, Europe Tap Strategic Reserves

Washington – Oil prices dropped sharply Thursday on news that the U.S. and Europe will sell 60 million barrels of oil from their strategic reserves over the next 30 days, a move experts called an important policy shift that should help restrain volatile energy prices.

Oil prices for month-ahead delivery fell by $4.39 a barrel, or almost 5 percent, to settle at $91.02 on the New York Mercantile Exchange. Oil prices rose by more than 20 percent earlier this year but closed Thursday near where they started the year. Gasoline prices nationally averaged $3.61 for a gallon of regular unleaded, down from $3.82 a month ago, but up sharply from $2.74 a year ago.

In simultaneous news briefings, the White House and the Paris-based International Energy Agency said that they'd release oil from emergency reserves, ostensibly to ensure adequate supply to refiners during the peak summer driving season.

Both said the protracted conflict in Libya has resulted in insufficient supplies of light sweet crude oil, more commonly refined in Europe, and that shortfalls were expected in coming weeks. Many European refiners didn't expect the Libyan conflict that began in February to drag on so long. It's removed an estimated 1.5 million barrels a day of oil from the global market, according to IEA.

The U.S. will release half the 60 million barrels, offering it for auction beginning next Wednesday. The U.S. consumes about 21 million barrels a day and the world about 88 million, but the 60 million barrels to be sold from the reserves nevertheless sends an important signal to oil producers and markets, analysts said.

Officials on each side of the Atlantic insisted that they weren't acting to affect prices per se, but rather to head off an anticipated shortage — which would drive up prices. The reserve was created in 1975 following the 1973-74 Arab oil embargo to give the nation an emergency supply in case of disruptions; it's not supposed to be tapped simply to drive down fuel price — as critics in Congress and business groups noted Thursday.

“We're focused on the disruption of supply and this is about insuring that … this will address the supply disruption” that has taken about 140 million barrels of oil off the market since February, said a senior Obama administration official who briefed reporters on the condition of anonymity. “This is about addressing the supply disruption and its potential impact on economic growth.”

It's questionable whether the lost Libyan supply has made much difference to the global supply-demand equation. There's little evidence of a global shortage in oil. The Organization of the Petroleum Exporting Countries has about 4 million barrels a day of spare production capacity.

Refineries in the U.S. — the world's biggest oil consumer_ are operating well below their capacity. Refiners are under investigation by the Federal Trade Commission for potential manipulation of oil prices. Their trade association suggested that Thursday's move is motivated to shore up Obama's political standing.

“Releasing oil from the Strategic Petroleum Reserve today, when gasoline prices are falling and there is no supply shortage, makes no sense and weakens our economic and national security,” Charles Drevna, the president of the National Petrochemical and Refiners Association, said in a statement. “The Strategic Petroleum Reserve … shouldn't be used as a Strategic Political Reserve to boost the popularity of elected officials.”

The U.S. Chamber of Commerce saw it similarly.

“The Obama administration's decision to release oil from the Strategic Petroleum Reserve is ill-advised and not the signal the markets need,” Karen Harbert, the president of the chamber's Energy Institute, said in a statement. “Our reserve is intended to address true emergencies, not politically inconvenient high prices.”

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House Speaker John Boehner, R-Ohio, joined the critical chorus. “By tapping the Strategic Petroleum Reserve, the president is using a national security instrument to address his political problems.”

However, independent energy experts saw an important shift in the use of strategic oil reserves. They said these reserves are now being used by 34 rich nations_ which collectively make up the Organization for Economic Cooperation and Development, with which IEA is affiliated — to quash financial speculation and pressure oil-producing nations.

“We would suggest that today's action represents the first genuine, offensive use of the OECD's 'defensive oil weapon' to send an unforgettable message to OPEC and also to non-commercial players in the crude markets,” said Kevin Book, the managing director for ClearView Energy Partners, in a research note.

By tapping reserves, Book suggested, rich oil-consuming nations are showing oil producers that they'll fight back when they think supply is being deliberately restricted to maintain high prices. OPEC collectively refused earlier this month to increase production, but Saudi Arabia separately began to do so and has vowed to raise production as much as 2 million barrels a day if necessary to restrain prices.

In Paris, Richard Jones, a former U.S. diplomat who is now the deputy executive director of the IEA, insisted that Thursday's surprise move had nothing to do with the June 8 collapse of OPEC negotiations.

“Before the release (announcement) took place, we were in consultation with some of these countries, and there is a good understanding that this is not an action directed against OPEC,” said Jones.

Jones and administration officials said no decision has been made on possible additional releases if Libyan supplies remain off the market further into the summer.

Book also contended that there's a message for financial players who now make 70 percent or more of trades in U.S. contracts for future delivery of oil.

“In recent conversations regarding potential (Strategic Petroleum Reserve) sales, several senior policymakers told us they blamed speculative interest in oil and products for current price premiums. The structure of today's sale suggests that OPEC wasn't the only target,” Book wrote.

Jim Burkhard, the managing director of global oil research for IHS Cambridge Energy Research Associations, said key answers will come when auctions begin next week.

“It will be telling if there is a rapid uptick (in price) of this offer … that would signal that the market may be a little tighter than we thought before this release,” Burkhard said. “If the uptick is weak or slow, that would signal that the market is relatively well supplied. Yes it's been released, but it's not certain how much of that oil will actually be purchased.”

Frank Verrastro, the director of energy programs at the Center for Strategic and International Studies, said: “If refiners bid on the … crude and actually put it in storage, it's because they believe the market is supplied. We will see what the reaction to the sale is.”

Soaring energy prices slowed the U.S. and global economic recovery. Prices have collapsed from the May high of $113 a barrel, but Burkhard expects them to fall further.

“It's a new form of economic stimulus,” he suggested, adding that there aren't many government tools left as earlier stimulus measures end. “There is not a whole lot left to try to boost the overall economy. If oil prices decline … that would be a positive for the economic recovery … It would diminish one of the economic headwinds that we have been facing this year.”

This will mark the fifth time that oil has been sold from the U.S. reserve. Previous sales were during the U.S. liberation of Kuwait in 1991 (17 million barrels); deficit reduction efforts in 1995-1996 (28 million barrels); an effort to bring down New England heating oil prices in 2000 (30 million barrels); and after hurricanes Katrina and Rita in 2005 (11 million barrels). IEA member states joined the 1991 and 2005 releases from oil reserves.

© 2011 McClatchy-Tribune Information Services

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