At least partly in response to lower crude oil prices, the Department of Energy has started buying oil in record quantities on spot markets to help fill the nation's Strategic Petroleum Reserve.
The peak addition so far came in May, when the reserve salted away more than 16 million barrels, an average rate of 513,000 barrels a day. But deliveries in June and July have held at an average of about 430,000 barrels a day, far more than the 100,000-barrel-a-day rate earlier this year.
One reason for the buying spree lies in the substantial decline of crude oil in the spring. After rising steadily for more than a year, average world crude prices fell from a high of around $35.50 a barrel in February to around $34 a barrel this month, according to the Lundberg Letter, an oil industry trade weekly. On the so-called "spot" or short-term market, declines have been even sharper. Prices for "Arab light" crudes, used as the OPEC benchmark, slipped from more than $37 a barrel on the spot market in early February to less than $32 this month.
The result was a bonanza for the SPR. To take advantage of the lower spot prices, the Energy Department shifted most purchases from long-term contracts into the short-term, spot deals.
Industry analysts differ on how the massive purchases have affected crude prices. "The buying has acted to take the bite out of any downward pressure on prices," one oil company spokesman said yesterday. Like other industry officials, he asked that neither he nor his company be identified, out of a desire to hold the company's trading cards close to the vest. "The reserve provides a place to put the oil," he said, "whereas otherwise they might dump it on the market for a lower price."
Lawrence Goldstein, a senior economist at the Petroleum Research Institute, disputed "the general perception that any kind of buying is going to push prices up." He said the heavy government buying is merely one more indication that prices are low, and that it actually may cause enough production increase to compensate for any upward price pressure. "In this kind of environment, it allows companies to lift more than they would otherwise," he said yesterday.
An oil company supply chief agreed. "I don't think the SPR has done much [to prices] recently," he said. "It gives a guy a hole to put it down, and he's able to defer a decision to cut production." Several major oil companies have been under host government pressure to maintain production of high-priced oil, especially in Libya, Algeria and Nigeria, despite losses they say range up to $6 a barrel.
Companies credit the Defense Fuels Supply Center, which handles negotiations for SPR purchases, with increasingly tough and businesslike bargaining. "Government people in general run on rails," said the supply chief. "Everything has to be exactly the same as the contract calls for. But the oil company people like to negotiate everything. Everything has a number on it." He said the SPR negotiators are more like company traders. "They try to chisel you in every way, shape or form, and I kind of like that.