Oil prices react to more than markets

In futures trading on the New York Mercantile Exchange, the price for a barrel of crude oil for November delivery reacted to the input by falling $1.24 to $34 a barrel.

Oil demand is up worldwide as economies expand, but analysts say prices have tripled in the last 18 months because producing nations have cut supplies deeper than necessary to recover from the 1997-98 price slump.

The presidential candidates were split Thursday over what should be done about it.

Vice President Al Gore urged releasing oil from the U.S. Strategic Petroleum Reserve to ward off a heating oil shortage this winter in the Northeast.

Texas Gov. George W. Bush said the federal government should save the reserve for wars or other disruptions and instead put pressure on friendly producing countries to pump more oil.

Venezuela, one of those friendly producers, suggested both strategies would fail to fix the heating oil problem.

Bernardo Alvarez, Venezuela's vice minister for energy, said U.S. refiners couldn't handle any more crude oil.

"This situation cannot be solved simply by making more crude oil available to the U.S. refineries," he said at a Washington news conference.

On Wednesday, Venezuela offered to create a heating oil reserve for the U.S. market, he said, but the Department of Energy turned down the offer and urged Venezuela to put any heating oil it has into the market.

"The U.S. government appreciates the spirit of cooperation with which the offer was made," Energy Department spokeswoman Jane Brady said.

U.S. analysts said two problems are intertwined.

Market conditions are having an impact on the heating oil situation. Inventories are low. U.S. refineries are working near capacity and can't easily make use of the high-sulfur, heavy crude oil produced by Venezuela. And transportation bottlenecks that caused price spikes last year haven't gone away. Heating-oil production increases from Gulf Coast refineries will need to reach the Northeast by barge or tanker because of limited pipeline capacities.

Market research firm Raymond James & Associates has warned that oil tankers are in short supply, which has caused tanker freight rates to more than double in the last year.

"The bottleneck in the oil supply chain will first occur in the oil tanker market," the firm said in a recent report.

Last week, the federal government, acting on an executive order from President Clinton, bought 2 million barrels of home heating oil for this winter that contractors will store in Connecticut and New Jersey. The heating oil reserve is separate from the Strategic Petroleum Reserve.

The administration has urged Congress to enact legislation setting conditions for triggering use of the heating oil reserve. The American Petroleum Institute has expressed concern about the federal stockpile, saying federal reserves will keep companies from building their own inventories.

World oil demand is still running higher than world supply, even though the Organization of the Petroleum Exporting Countries recently voted to raise production by 800,000 barrels a day to drop prices back to its target range of $22 to $28 a barrel. Most of that oil is already in the market, however, and several analysts have estimated world demand is still at least 300,000 barrels a day more than OPEC's target.

"A crude oil output increase would improve the price situation," said John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. "If crude oil prices went down significantly, product prices would follow, and heating oil prices would be lower."

Mr. Lichtblau said Venezuela's offer of heating oil storage facilities and increased production from its U.S. and Caribbean refineries was "interesting, but nothing special."

Mr. Lichtblau said Mr. Alvarez made a more tantalizing statement when he said Venezuela, contrary to industry expectations, has plenty of spare crude oil production capacity.

Under OPEC's current rules, Venezuela's production quota is 2.96 million barrels a day, and most industry analysts have pegged its maximum capability at 3 million.

Mr. Alvarez said Venezuela can pump 3.6 million barrels a day and will look at raising production if OPEC's latest supply hikes don't bring prices down to the target range.

"If they can do it, they should," Mr. Lichtblau said. "In this situation, it's a matter of great importance to try to help their major customers. I don't think anybody in OPEC would object."