With U.S. oil refining capability in the Gulf of Mexico still crippled from damage caused by Hurricane Katrina, analysts say the release of oil from emergency stocks in America and overseas may have created an over-abundance of crude, a tactic they believe is aimed at capping record prices.
The Financial Times reports that U.S. refineries will bid today on 30 million barrels of crude to be released from the nation’s 700-million barrel emergency reserves. But some analysts told the publication they weren’t sure oil companies are eager to get the supply.
“I will not be surprised if they don’t bid for all the barrels,” Katherine Spector, of JP Morgan in New York, told FT.
According to industry reports released this week, oil companies have plenty of crude in their inventories, but gasoline supplies remain tighter than normal. That’s because storm damage caused by Katrina disabled as much as 10 percent of U.S. refinery capability; about one-third of all American oil refinery capacity is located in the Gulf region.
President Bush, meanwhile, has said the aim of releasing emergency stocks from the U.S. Strategic Oil Reserve is meant to relieve shortages, not prices.
The same line of reasoning is being used by the International Energy Agency, or IEA – an oil watchdog for industrial nations – which announced last week its 2 million-barrel-per-day release for the next 30 days is meant to shore up crude supplies, FT reported.
Combined with U.S. figures, that’s 60 million barrels – more than covering last week’s losses and expected losses over the next 40 days, say analysts.
At the same time, analysts note U.S. crude oil inventories actually are well above 2004 levels, as well as average levels dating back five years, FT says.
By week’s end, five U.S. refineries – which account for about 5 percent of U.S. total capacity – were still not operating.
By midday, oil prices had risen by about 40 cents on news that crude oil production in the United States damaged by Katrina would be slow to recover. According to Bloomberg News, the price had reached $64.90 a barrel on the New York Mercantile Exchange at 11:01 a.m. Eastern time.
At $65 a barrel, that translates into $1.55 a gallon before refining, distribution and taxation, Ron Gold, an analyst at the Petroleum Industry Research Foundation, said.
On the one hand, the IEA says American production capacity will be back to about 90 percent in just a few months. But on the other, the agency says production capacity will recover more slowly.
Bloomberg reported that part of the reason oil futures rose today was due to “reports from Royal Dutch Shell Plc and the International Energy Agency that U.S. production will be slow to recover after Hurricane Katrina damaged rigs and refineries along the Gulf coast.”
Agence France-Presse, however, reports the IEA says in a newly released study its data “shows world supply 2 million barrels a day above August 2004.” And, despite some heavy damage to deep-sea and shallow-water oil rigs, the IEA believes “many of the effects are expected to be temporary and readily repairable.”
And in good news for consumers, retail gasoline prices have eased somewhat in the past few days. But analysts say even with full production capacity restored, motorists still may not see prices at pre-Katrina levels.
“That conclusion, analysts say, stems from a simple equation involving the cost of a barrel of crude, markups by middlemen and little margin for error in the nation’s energy infrastructure,” writes Mark Trumbull, a staff reporter for the Christian Science Monitor.
Why conflicting reports? A lot of market speculation, says David J. Ramberg, an economist and vice president of publications for Economic Insights, Inc., a consultancy firm that follows energy issues.
“Futures prices have continued to push up the spot price,” Ramberg told WorldNetDaily. “That happens because we’re getting a lot of hedge funds participating in the futures markets now, after the dollar [has] bombed out. So they’re continuing to give pressure to crude oil, even when supply goes up.”
He also said, however, that continued higher prices eventually would spur more exploration and production, which should lead to an easing of price pressures. But that could take years.
Katrina hit at a time when the demand for oil has dramatically increased not only in the United States but in Asia and parts of Europe.
Where Katrina’s damage hurts America the most, however, is in the area of oil refining: U.S. capacity has not expanded in years, so any refinery loss will affect supplies and exert price pressures.
“It’s difficult for a refiner to expand operations because of environmental laws” and other regulations, Ramberg said.
Also, U.S. emissions standards are so tight that “most of the world’s gasoline is not permitted for use in the U.S. because it doesn’t burn clean enough.”
According to the Energy Information Agency, a division of the Department of Energy, average retail gasoline prices are about $3.07 a gallon, up from $1.22 a gallon a year ago and 46 cents from last week.