Bush Oil Reserve May Support Prices as Asia Also Buys
    By Christian Schmollinger and Winnie Zhu
    Bloomberg

    Wednesday 24 January 2007

    George W. Bush's decision to double the emergency oil stockpile in the U.S. may help to stem a six- month slide in prices as China, India and South Korea also add to demand by bolstering their defenses against shortages.

    Oil gained the most since September 2005 yesterday after the U.S. Energy Department said it will boost the Strategic Petroleum Reserve to 1.5 billion barrels over 20 years. China, where imports rose 15 percent last year, began to fill its reserve in October. India also plans to double its inventories.

    The U.S. plan "helps puts a floor in the market," said Antoine Halff, head of energy research at Fimat USA Inc. in New York. "It creates competition for the same barrels. It tightens the market on top of the strategic reserve builds elsewhere such as China."

    Oil consumers are increasing stockpiles on concern that political instability in the Middle East, terrorism and hurricanes may cause supply disruptions. Governments may buy during dips in prices, supplementing demand growth that's forecast to slow this year by the International Energy Agency.

    The U.S. move "will also alert China to be more aggressive in building up their strategic petroleum reserve," Gordon Kwan, Hong Kong-based China oil and gas research director at CLSA Ltd., said in an e-mailed strategy update. "Oil prices will likely extend their rebound heading into the summer driving season. $50 oil appears to be a solid floor."

    Oil Prices

    Yesterday, benchmark New York crude oil futures jumped 4.7 percent to $55.04 a barrel, their biggest one-day gain since Sept. 19, 2005, when Hurricane Rita in the Gulf of Mexico threatened oil pipelines, refineries and production platforms. Oil for March delivery fell 56 cents to $54.48 a barrel at 11:30 a.m. today on the New York Mercantile Exchange.

    Mild winter weather in the U.S. has sapped demand for heating fuels and helped push oil prices lower. Last week, they dropped below $50 a barrel for the first time since May 2005, a decline of 36 percent from their all-time high in July.

    The Organization of Petroleum Exporting Countries has been cutting output to try to stem the decline, most recently announcing a 500,000 barrel a day reduction. The U.S. plan to boost reserves will start in a few months with the purchase of about 100,000 barrels of crude per day, adding to the impact of any reductions in supply.

    US Purchases

    "Purchases are likely to be made when prices are low and now seems to be the right time after the recent fall," said Makoto Takeda, an energy analyst at Bansei Securities Co. in Tokyo. "Prices will be supported."

    U.S. Energy Secretary Samuel Bodman told reporters on a conference call yesterday that the government "will acquire crude oil in a manner that does not adversely affect the market or raise gasoline prices." The country's reserves, stored in salt caverns along the Gulf of Mexico coastline, are at 691 million barrels and have a capacity of 727 million today.

    It will cost $10 billion to build new storage facilities to expand the storage capacity and $55 billion for the additional crude, according to Energy Department spokesman Craig Stevens.

    "The doubling of strategic stockpiles should give a lot of comfort for an emergency," said Anthony Nunan, assistant general manager of international petroleum business at Mitsubishi Corp.

    Last week, the IEA cut its forecast for 2007 global oil demand by 160,000 barrels a day to 85.77 million barrels day. Demand will rise 1.6 percent from last year.

    Japan and China

    Japan, which imports 99 percent of its oil, has 585 million barrels in government and private crude and oil product inventories, equal to 177 days of supply. There are no plans to boost the inventories, said an official at state-run Japan Oil, Gas & Metals Corp., which maintains government stockpiles.

    Zhou Fengqi, senior adviser at the Energy Research Institute of China's National Development and Reform Commission, the top state planner, said he estimates the stockpile China is building will hold about 88 million barrels, or 30 days of imports. That may rise to about 90 days of imports.

    "We don't wish to compete with anyone," Liu Jianchao, a China foreign ministry spokesman said today in Beijing. "We want to increase cooperation with the U.S. on energy, not compete."

    India, Asia's third-largest consumer, should build an emergency stockpile of 10 million tons (73 million barrels), a government panel said on July 11, 2005.

    "We are working on building strategic reserves," India's Oil Minister Murli Deora said today. "China is also doing it in a big way, and we are also doing the same."

    South Korea

    At the end of last year, South Korea's state oil company had 76 million barrels, or 57 days of demand, in its emergency stockpile. Local refiners had 95 million barrels, or 67 days. The state oil company plans to hold 141 million barrels by 2010, said Koo Cha Kwon, head of Korea National Oil Corp.'s global oil research team.

    "The U.S. has taken the initiative and may cause competition among other nations to increase reserves," Koo said.

    The U.S. tapped the emergency stockpile in 1991 after Iraq invaded Kuwait and in 2005 after Hurricanes Katrina and Rita disrupted pipelines, refineries and Gulf of Mexico production.

    "For too long our nation has been dependent on foreign oil," President Bush said in his annual State of the Union address Tuesday evening Washington time. "This dependence leaves us more vulnerable to hostile regimes, and to terrorists, who could cause huge disruptions of oil shipments."