NEWS AND COMMENTARY September 25, 2000 Crude Oil Falls After U.S. Orders Release of Emergency Reserve By Mark Shenk, Bloomberg Oil Prices Will Soon Gush Back to New Heights ... Weiss comments NEW YORK - Crude oil fell more than 5% to its lowest price in six weeks after U.S. President Bill Clinton ordered the release of oil from an emergency reserve to bring prices down from 10-year highs. The 30 million barrels is the largest release of crude oil from U.S. stockpiles since the 1990-91 Persian Gulf War. The U.S. wants to make sure consumers have enough heating oil for winter, though refineries are running at close to capacity and stockpiles still are down 35 percent from a year ago. "We can't process the new crude, all the refineries in the U.S. are running at near 100 percent of capacity," said William Greehey, Chairman and Chief Executive of San Antonio-based Valero Energy Corp. the second-biggest independent U.S. refiner. "Capacity throughout the world is being stretched." Crude oil for November delivery fell as much as $1.82, or 5.6%, to $30.86 a barrel on the New York Mercantile Exchange, the lowest price since Aug. 14. Last week, prices reached a 10- year high of $37.80 a barrel. In London, Brent crude oil for November settlement fell as much as $1.35, or 4.3 percent, to $29.90 a barrel on the International Petroleum Exchange, the lowest price since Aug. 22. U.S. refineries are running at about 95 percent of overall capacity, according to the American Petroleum Institute, leaving little room for higher output of petroleum products. "We don't really know if this will change the supply situation," said Michael Fitzpatrick, a trader at Fimat USA Inc. in New York. "It may just change perceptions of the situation." The U.S. government's decision to release the emergency oil reserves has helped to ease ever-rising oil prices, but the price drop will not last and this action could have dangerous repercussions down the road. The main reason oil and gas supplies are so tight in the U.S., as we have been saying all along, is that oil refineries in this country are near full capacity. Even if OPEC -- or the U.S. in this case -- increases oil output, the oil refineries cannot turn the crude into heating oil and gasoline quickly enough to depress prices at the pump. More importantly, in terms of long-term repercussions, the U.S. now faces tougher negotiations with OPEC. OPEC will be less willing to increase crude output knowing that the U.S. will use emergency reserves to depress crude prices even more. Also, having a stockpile of oil reserves that U.S. companies can dip into when market prices are too expensive will prompt U.S. distributors to limit their own inventories to a point where they have even less oil on hand than they do at present. That, in turn, will make the U.S. more vulnerable to price fluctuations in the future. And let's not forget one last very important point: When we dump some of our strategic oil reserves, it means less supply. With demand greatly exceeding supply, the drawdown of strategic oil reserves is very bullish for oil on an intermediate and longer-term basis.

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