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Oil Crisis?
Refinery utilization rates are holding.


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In recent weeks, inventory reports from the Department of Energy show that despite challenging oil-market conditions — such as the oil workers’ strike in Venezuela and the increasing probability of war with Iraq — oil refiners are still refining crude at near-normal rates.

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Since the oil workers’ strike began on December 2, roughly 67 million barrels of Venezuelan crude imports to the U.S. have been lost. Meanwhile, U.S. crude inventories have fallen by only 16.4 million barrels since that date. Since OPEC only agreed to raise production a week ago, to help offset the effects of the strike, where are refiners finding the crude to maintain a refinery utilization rate of more than 90% — a typical level for this time of year?

It seems that refiners, who normally process a total of 1.1 million barrels a day of Venezuelan crude, have managed to find other sources for all but 155,000 barrels a day. In other words, U.S. refiners are running 86% of their Venezuelan crude capacity with crudes from other sources.

It appears that replacement barrels to date are predominantly Saudi crude. But how is it that Saudi crude is so readily available? It takes approximately six weeks for crude tankers from the Middle East to reach the U.S. The answer is that the oil is not coming from the Middle East, but from stockpiles in the Caribbean, where the Saudis own storage terminals.

Although little data is available on the role these storage facilities are playing in supplying the U.S. market today, it looks to be significant. Reportedly, inventories were built in the second half of last year as a buffer in the event of war in Iraq. In addition to Saudi crude, supplies from Canada and Mexico have helped cover the shortfall.

No other source seems capable of covering the remaining shortfall in a timely manner. However, ironically, Iraqi production has increased in the last six weeks in the face of a U.S. military buildup for possible war. Iraqi exports should begin to show up in the U.S. in the next few weeks. Iraq produced an average 2 million barrels a day in 2002, but the average for the month of December is estimated at approximately 2.4 million barrels a day. Today, production by Iraq is estimated to have increased to 2.8 million barrels a day.

With U.S. crude inventories approaching minimum operating levels, and higher production from OPEC still several weeks away from U.S. shores, the Saudi stockpiles in the Caribbean and Iraqi crude could play an increasingly important role in supplying U.S. refiners in the coming weeks. And once the strike ends in Venezuela, operators estimate they will need about 15 to 30 days to return the heavy-oil fields to pre-strike production levels. This is faster than expected.

Oil crisis, you say?

— Mr. Leuffer, CFA, is senior managing director and senior energy analyst for Bear Stearns & Co. Inc.



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