Strategic reserve shifted to flow mode

www.heraldtribune.com By H. JOSEF HEBERT Associated Press Writer

As the United States and Iraq move closer to war, oil markets seemed to be taking it all in stride. Global crude oil stocks are growing, prices declining and some analysts are talking cautiously of a possible oil glut on the horizon. Lower energy prices probably would follow.

That is, energy experts warned, if a war in Iraq doesn't drag on and Iraqi leader Saddam Hussein doesn't torch his oil fields or, in the worst case, finds a way to disrupt other Persian Gulf supplies.

For now, the markets are betting those things won't happen and that the war will be a swift one.

Oil prices dropped by more than $3 a barrel, or about 9 percent, on Tuesday, falling to their lowest in more than two months as traders believed there is enough crude in the system to make up for Iraq's lost production if war erupts.

Oil traders "are beginning .. to realize there's a bit of a glut of oil around," said Leo Drollas, chief economist of the London-based Center for Global Energy Studies.

But that oil has yet to reach the U.S. markets.

The Energy Department said Wednesday U.S. crude oil stocks remained uncomfortably low at 270 million barrels, roughly where inventories have been most of this year and at the minimum industry says is needed for smooth refinery operation. The U.S. stocks increased only slightly over a week ago.

Crude inventories have consistently been 300,000 to 400,000 barrels below a year ago, said Doug MacIntyre, an oil analyst for the Energy Information Administration. Imports also have been down from previous levels, although OPEC producers other than Iraq and strife-torn Venezuela have been pumping more oil for weeks.

The low U.S. inventories reflect transportation delays, but also reluctance by refiners to buy oil when the price has been $35 to $37 a barrel, analysts said.

Much of that oil is now in storage in the Persian Gulf or in tankers on the high seas, say oil analysts. Saudi Arabia is believed to have as much as 50 million barrels in storage in the country and more en route to other storage facilities. That's enough to replace Iraq's 1.5 million to 2 million barrels a day for about a month.

Larry Goldstein, president of the private Petroleum Industry Research Foundation, said the markets also have been calmed because the Bush administration has made clear that it's ready to use some of the 600 million barrels in the Strategic Petroleum Reserve to counter shortages.

Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, said this week he is convinced the reserve is capable of providing oil quickly on orders from President Bush. It has shifted "from the fill mode to the flow mode," Tauzin said.

Still, there remains some trepidation among oil traders and analysts should war in Iraq last a while. Crude oil prices are likely to remain volatile in the months to come, they cautioned.

"This thing could go right back up," said Tom Bentz, an analyst at BNP Paribas in New York, suggesting prices could rebound once fighting erupts. "We're still vulnerable because inventories are tight."

When prices jumped in the weeks before the Gulf War, oil inventories already were high. That helped cushion the impact on prices, which jumped briefly to more than $40 a barrel and then declined rapidly when it became clear that the war would be settled quickly.

The biggest fear in the market is that oil facilities in other Middle Eastern countries, such as Kuwait or Saudi Arabia, could be attacked - a scenario that would cause oil prices to shoot higher very quickly, said Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York.

Short of that happening, there is plenty of oil, Gheit said, and the recent price declines make clear that for the time being the "war premium" has disappeared. He said prices could drop an additional $5 a barrel in the coming days.

Energy experts say a glut could result if war in Iraq doesn't drag on and Iraqi leader Saddam Hussein doesn't torch his oil fields or disrupt other Persian Gulf suppliers.

For now, the markets are betting those things won't happen and that the war will be a short one.

Associated Press Writer Brad Foss in New York contributed to this report.