Rising Oil Prices Slow Flow to U.S. Refineries -Stockpiles of Fuel At Historic Lows
By Peter Behr Washington Post Staff Writer Monday, March 31, 2003; Page A22
The rebound in crude oil prices last week, triggered by Iraq's resistance to U.S.-led forces, has slowed the flow of oil imports to U.S. refineries and the production of gasoline, leaving motor fuel stockpiles at historically low levels as the summer driving season approaches, energy analysts warn.
The uncertain course of the war and the accompanying gyrations in oil prices are making U.S. energy companies wary about rebuilding depleted fuel inventories with high-priced crude. The companies also are worried that a sudden favorable turn in the war could caused oil prices to plummet.
"If we ever get past this crisis, crude prices will drop like a rock," said Mary Rose Brown, vice president and spokesman of Valero Energy Corp. in San Antonio, one of the largest U.S. refiners. "Does it make you more cautious? Yes. Any barrel you buy today that would have been be cheaper next month -- that would be a stupid move."
The caution is widespread among refiners, too. In the week ending March 21, U.S. refineries produced less gasoline and other products than the week before, even though oil is available.
But if gasoline inventories are not in better shape when gasoline demand picks up on Memorial Day, pump prices could stay high through next fall, the Energy Information Administration warned last week.
A big increase in crude imports is needed to refill gasoline stockpiles, the EIA said. "However, the evidence so far suggests that either this is not happening, of that if so, the pace is barely perceptible," it warned.
Gasoline inventories in the United States have been falling since early this year, following a strike in December that closed down Venezuela's oil fields, a crucial source of both oil and gasoline imports. As of mid-March, U.S. gasoline inventories were 6 percent below levels a year ago and pump prices have risen as inventories shrunk.
Motorists got a bit of relief after oil prices plunged in energy markets' optimistic reaction to the onset of the Iraq war on March 20. The cash or spot prices of a benchmark U.S. crude brand, West Texas Intermediate, stood at $37.87 a barrel on March 12, but by the war's second day, had plunged to $27.18, the EIA said. Gasoline prices followed with a small downward move, with the national average price for regular brands dropping from $1.72 in mid-March to $1.69 at the end of last week.
But the end of last week, crude oil prices had climbed to $30.16 a barrel on U.S. markets, and gasoline prices generally follow the direction of oil prices. In trading early today, U.S. light crude rose 13 cents, to $30.29 a barrel.
With an uncertain war timetable, U.S. refiners cannot reliably predict when oil prices and gasoline prices might drop. That makes them unwilling to take the risk of increasing their import purchases on a large scale, even though there is plenty of oil around, said Jeff Goetz, director of Poten & Partners, a New York-based marine consulting group that tracks oil tanker shipments. "There's enough oil."
The Iraq war did not cause an immediate oil shortage, even though the conflict cut off nearly 2 million barrels of daily crude oil supplies, or about 3 percent of the world's needs.
In February, Saudi Arabia and other Persian Gulf producers increased oil production to counter a sharp increase in crude prices caused following the Venezuelan strike. Now that additional oil, equal to 1.5 million barrels of daily supply, is arriving at refineries along the Gulf of Mexico, completing a 45-day voyage from the Persian Gulf.
But all the cargoes are not being snapped up by refiners, industry analysts and officials said. Many refiners apparently are buying enough to serve motorists' current needs, but not enough to rebuild stocks. "They are looking to buy the oil when they need it," Goetz said. "When they are uncertain about the future, they hold back."
A refiner that bought a supertanker's cargo of 2 million barrels of oil at $30 a barrel could lose millions if gasoline prices fall before that tanker cargo can be refined into gasoline and the fuel is distributed for sale to service stations. "The risk of oil prices going from $40 to $25 [a barrel] are much higher than going to $60," he said.
Valero lines up two-thirds of the oil it needs through advance contracts. The rest is purchased just as it's needed, on the spot market. "There are a lot of cargoes on the water, and a lot of oil headed this way that doesn't have a buyer," Brown said.