U.S. Faces Summer Gasoline Crunch

foxnews.com Monday, March 17, 2003

NEW YORK — Time is running out for extra oil supplies expected from the OPEC cartel to hit U.S. shores and allow the world's biggest fuel consumer to smoothly build gasoline supplies before the summer driving season.

Not getting the supplies could leave the United States more dependent on imports than ever, at a time when the White House edges to the brink of war on Iraq and retail gasoline prices hit all-time highs, threatening the stuttering economy.

"The U.S. needs large slugs of extra oil to cope with the increase in (refinery) runs, stop the erosion of inventories and to begin to claw back some cover," JP Morgan said in a research note. "The U.S. oil market is undersupplied."

U.S. oil stockpiles have fallen below 270 million barrels, the government's suggested level for seamless operations, as supply disruptions from Venezuela and an unusually long, cold winter drained supplies.

Resulting inventories, near the lowest level since 1975, could prove a problem for U.S. suppliers, who tend to use the brief respite in consumer demand in the second quarter to refine more crude and build fuel stocks before summer.

"The main problem is that while global oil demand does indeed hit a minimum in (the second quarter), U.S. crude oil runs increase," said JP Morgan, meaning deeper declines in crude supply are likely if imports don't shoot higher.

The U.S. second-quarter increase in crude oil demand averaged roughly 1 million barrels per day in 2001 and 2002, and is expected to be even sharper this year as the industry struggles to buffer paper-thin inventories.

"There's potential for trouble," said Tim Evans, senior analyst at IFR-Pegasus. "Low crude inventories limit the extent to which higher refinery rates can be sustained. But the cavalry rising up over the hillside is represented by OPEC, which has already started pumping away."

OPEC, which accounts for 60 percent of world oil exports, has signaled it will defend against global short supply by increasing shipment volumes even as it declines to lift its official production curbs due to worries over overall weakness in global demand.

OPEC powerhouse Saudi Arabia has already raised production sharply in the first two months of this year to make up for lost Venezuelan supply. Tanker brokers said Friday the kingdom snapped up 14 tankers to move 29.5 million barrels of crude oil to the U.S. Gulf for May delivery.

So far, the increased production has yet to translate into higher U.S. crude stockpiles.

And, while Saudi Arabia has reassured the market that it will continue to pump more oil in the event of a war, there are doubts about whether Riyadh has enough spare capacity to compensate fully for disruptions from Iraq, which has a sustainable export capacity of 2.2 million bpd.

The International Energy Agency in a monthly report on the oil market outlook released Wednesday estimated that OPEC in total has only 900,000 bpd to spare, with 400,000 bpd in Saudi Arabia.

If crude becomes scarce enough to hinder the U.S. oil industry's attempt to build up gasoline supplies before summer, pump prices will likely continue to surge, pushing through record levels.

The average retail price of gasoline in the United States on Saturday was $1.719 a gallon, a new all-time high, according to the American Automobile Association's latest survey.

The U.S. inventory situation has worried the White House enough to consider tapping the Strategic Petroleum Reserve -- something reserved for only the most dire supply crunches.

U.S. Energy Secretary Spencer Abraham said Friday Washington reserved the right to make a unilateral release of crude from the emergency reserve in the event of a severe supply disruption. The statement came after a similar comment from Japan, which said it would tap its reserve if Iraq is invaded by U.S.-led forces.

Sen. Jeff Bingaman, the top Democrat on the Senate Energy Committee, urged the Bush administration on Monday to immediately begin releasing up to 750,000 barrels of oil a day from the reserve until fresh OPEC supplies arrive.

Oil from the Middle East takes about 45 days to reach the U.S. market.

"This modest release would complement and not compete with the oil that is heading this way," Bingaman said. "We will be helping to prevent a gasoline supply shortage and further price spikes," he said.