Oil Falls on Friday's Order by Clinton to Tap Reserves - TheStreet

Updated from 1:44 p.m. EDT

Oil prices fell to their lowest levels in a month on Monday, spurred by President Clinton's decision to release 30 million barrels of oil from the nation's reserve in an effort to avert a national fuel crisis this winter.

The November contract for crude oil fell $1.11 or, 3.4%, at $31.57 a barrel on the

New York Mercantile Exchange

Monday, as the market reacted to Clinton's

order, which was announced after the market closed on Friday.

The decision to tap into the nation's strategic petroleum reserve -- an action not taken since the Persian Gulf War -- will add another 1 million barrels of oil per day to the market for a 30-day period. The oil slated for release represents about 5% of the total reserves, all of which should be replaced sometime next year.

Energy Secretary Bill Richardson said the

Department of Energy

would solicit bids for the crude oil from refiners this week and could release the oil within the next two weeks. He added that another release could be ordered if necessary after the administration had a chance to assess the impact of the first release.

The decision, which has been criticized as being politically motivated, is likely to have a more profound effect because it accompanies a planned production increase by the

Organization of Petroleum Exporting Countries

, or OPEC which kicks in on October 1.

OPEC announced two weeks ago that it would raise its output target to 26.2 million barrels a day beginning next month. But analysts and industry groups estimate that the actual increase is not likely to be anywhere near OPEC's goal of 800,000 additional barrels a day since many OPEC members are already producing at or above

capacity.

Still,

Deutsche Banc Alex. Brown

analysts estimate that the boost in supplies should help push crude oil prices in the U.S. back below $30 a barrel by year's end and toward the low $20s per barrel by the second half of next year. The oil released from the reserves could speed up that timetable "by taking some of the near-term fear of shortages out of the oil market."

Tim Evans, senior energy analyst at

IFR -Pegasus

, projects prices could fall between $28 and $30 a barrel as the additional oil is released into the market. But whether prices remain there after the release of the reserves has been completed may depend on what OPEC does next.

OPEC ministers have a summit meeting tomorrow and Wednesday in Venezuela, but the cartel's next regular meeting is not scheduled until November 12. It seems unlikely that the oil cartel will boost output again at that time -- particularly as the price of its "basket" (which includes blends from Algeria, Indonesia, Saudi Arabia and Venezuela) has now eased back into its target band of $22 to $28 a barrel.

Christopher Stavros, an oil analyst at

PaineWebber

, estimates the release of the additional oil could help push oil prices in the U.S. as low as $25 per barrel. However, the firm is not convinced that tapping into the country's reserves now will resolve the underlying issue of tight diesel fuel and heating oil supplies as winter approaches.

Still, heating oil and gasoline prices were down slightly early Monday afternoon. The October heating oil ended down 0.014 cents at 94.07 cents per gallon. The October contract for unleaded gasoline ended down 0.013 cents at 92.70 cents per gallon.

Richardson estimates the release of the additional oil from the country's reserves should provide some price relief in the upcoming months by increasing heating oil stocks by about 3 million to 5 million additional barrels this winter.

But Stavros points out that, as of mid-September, domestic inventory levels of distillates, which include heating oil and diesel fuel, were at about 115.9 million barrels -- 19% below last year's levels. He said total heating oil stocks are nearly 50% lower than a year ago in the East Coast, the region most dependent on heating oil.

"The only way to alleviate the tight supply of heating oil is obviously to refine the additional crude oil," wrote Stavros, in a commentary Monday. That may take time, as refineries are already running at about 95% of capacity and many facilities have major maintenance work scheduled over the next few months.