Low US petroleum stocks may hurt refiners

news.ft.com By Carola Hoyos in New York and Adrienne Roberts in London Published: January 21 2003 20:04 | Last Updated: January 21 2003 20:04

Refiners are facing the possibility of being forced to reduce their operations as US crude oil inventories reach historic lows.

Inventory data to be released on Thursday are expected to show that the US's commercial levels of crude oil have dropped below the 270m-barrel level at which the distribution system of pipelines and oil storage tanks begins to falter.

Even without technical difficulties, refiners faced with diminishing profit margins because of low crude oil supply and high levels of gasoline stocks are considering slowing their operations, possibly foreshadowing an expensive season for US motorists this summer.

George Beranek, manager of market analysis at PFC Energy, a Washington-based consulting firm, expects refiners to slow down operations because of the recent supply squeeze caused by the crisis in Venezuela. That has taken more than 70m barrels of crude oil out of the world market.

Citgo, which relies on Pdvsa, Venezuela's state oil company and Citgo's parent, for half its crude oil, has been hardest hit, as have refiners that process Venezuela's heavy crude oil and for whom lighter grades from other Opec countries are imperfect substitutes.

According to the International Energy Agency, the US is not the only region to suffer from falling oil inventories, with European and Pacific supplies also showing significant losses.

Although Venezuela's exports are slowly increasing and US refiners welcomed Tuesday's news that oil tanker workers in western Venezuela were on the verge of going back to work, they warn that the interruption is far from over.

A breakthrough in Venezuela would be good news for US President George W. Bush, who has come under increased pressure to release some of the 600m barrels of the country's strategic reserves to help cool oil prices.

They have recently flirted with two-year highs because of Venezuela's woes and the possibility of war with Iraq.

But the Bush administration is keen to hold on to as many of its own extra barrels as possible following Opec's decision at its meeting in Vienna earlier this month to dip into its additional production capacity, promising to increase production by up to 1.5m b/d.

John Felmy, chief economist at the American Petroleum Institute, an industry group, agrees, arguing that the US needs to "keep its powder dry".

That will be especially important if the US intends to go to war in Iraq.

Venezuela's outage has prompted US refiners to rely increasingly on Iraqi crude oil exports in the past two months, and Opec has already made clear that it would find it difficult to make up for a loss in production from both Venezuela and Iraq.

Public oil supplies - government-controlled oil at the EIA's disposal in an emergency - are about 1.28bn barrels. This includes about 595m barrels in the US strategic petroleum reserve.

The IEA, which controls strategic oil reserves for 26 industrialised countries, says public oil stocks would be enough to cope with a crisis the size of the 1978-1979 Iranian revolution. That was the largest disruption in history and, analysts say, the closest precedent to a combined Venezuelan/Iraqi outage.