Pre-war slide in oil prices may be short-lived-EIA

www.forbes.com Reuters, 03.19.03, 3:46 PM ET By Richard Valdmanis

NEW YORK (Reuters) - The dramatic slide in oil prices in recent days, triggered by expectations of a swift U.S. military victory in Iraq, may be short-lived as domestic fuel stockpiles remain thin, the U.S. Department of Energy said Wednesday.

U.S. oil prices have fallen 20 percent in the past week to under $30 a barrel, mirroring the drop in prices at the onset of the first Gulf War more than a decade ago. But the current slide appears less justified due to extremely tight supplies ahead of peak driving season in the U.S., the government said.

"Of course, the major difference is the level of inventories," the Energy Information Administration, the DOE's statistical wing, said in a report.

At the start the Gulf War in 1991, U.S. oil stocks were "28 million barrels above what was thought to be the minimum operating inventory level (OIL), unlike today, when they are barely above the lower OIL," the EIA said.

While demand for fuels like gasoline and diesel tends to fall in the spring, demand for crude oil remains high as refineries increase their run rates to build up fuel stocks for the seasonally higher demand in summer -- calling for increases in U.S. imports of crude.

U.S. oil inventories rose 400,000 barrels to 270.2 million barrels, just above the minimum inventory level of 270 million barrels suggested for smooth operations, in the week ended March 14, the EIA said in a weekly report.

The small increase in supplies was due to a rise in import levels from Canada, Nigeria and Iraq. Oil dealers have also been anticipating higher import levels from Saudi Arabia, which has increased production sharply this year, and Venezuela, which is recovering from a two-month oil workers' strike.

OPEC President Abdullah al-Attiyah has told the International Energy Agency that the oil producer group stands ready to cover any supply shortfall due to the imminent war on fellow member Iraq.

But concerns remain whether the modest increase in oil imports will be enough to satisfy rising refinery demand as U.S. oil suppliers struggle to beef up pre-summer fuel supplies.

"This year the inventory build will need to be greater than normal as oil inventories are very low across the board," the EIA said in its report. "Inventories now are not as well stocked as they were in January 1991, by any measure, meaning a greater dependence on imported oil to meet demand."

The EIA said that the tight supply situation could support prices near $30 per barrel and support imports, even without disruptions to Middle East oil supplies due to war on Iraq, meaning consumers will continue to see unusually high pump prices for gasoline.

"While we may just be hours away from the beginning of the end of this chapter on Iraq, we may still be weeks, or even months away from seeing retail prices return to levels consumers are used to paying, thus returning to a sense of 'normalcy' in oil markets," the EIA said.