Oil Falls to $31.50 a Barrel - TheStreet

Updated from 1:22 p.m. EDT

The decline in crude oil prices slowed Tuesday after a morning rise in prices was erased as industry groups and analysts questioned how much of an impact the recently-announced release of U.S. oil reserves would have.

While the addition of 30 million barrels of oil should help ease supply concerns somewhat, industry analysts have said the release of oil reserves may prove to be little more than a temporary balm.

Speculation that the

Organization of Petroleum Exporting Countries

, or OPEC, might approve another oil output increase at their summit, which begins Tuesday, had also helped to push prices down. But OPEC President Ali Rodriguez may have put that speculation to rest Monday when he indicated the oil cartel would not discuss the release of more oil before OPEC's next official meeting on Nov. 12.

The crude oil contract went up early in the day for November delivery before closing down 7 cents to $31.50. The November contract for heating oil finished down about a penny at 93 cents a gallon.

Oil remains about 15% lower than it was last Wednesday, when the October crude oil contract, which expired after Wednesday's session, hit a 10-year high of $37.80 a barrel on the

New York Mercantile Exchange

.

Crude oil prices began slipping Thursday after the Vice President and presidential candidate Al Gore suggested that the administration should release oil from the nation's reserves to prevent a winter fuel crisis. President Clinton's

decision to release 30 million barrels of oil over a 30-day period came late Friday after the regular trading session had ended.

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 could begin flowing into the market within the next two weeks.

But in a commentary Monday, Francis Markey, a contributor at

Economy.com

, predicted the price easing would be short-lived, "as the U.S. government's plan is not capable of changing the underlying structural factors that led to high oil prices in the first place."

In addition, the

American Petroleum Institute

, or API, which represents the oil industry, said that while the release may slightly reduce crude oil and product prices, it is unlikely to provide as much relief for those who depend on heating oil this winter as the administration had hoped.

John Felmy, API director of policy analysis and statistics, said the nation's refineries are already running at nearly full capacity. "There is a limit to how hard refineries can run, consistent with providing for the safety of refinery workers," he said Monday, in a statement.

Indeed, last week, refineries were estimated to be running at 95% of their capacity -- higher than last year's levels. At the same time, however, inventory levels for crude oil and distillate products, which include heating oil and diesel fuel, are much lower than a year ago. And the latest government and industry figures showed crude oil inventories actually fell by as much as 2.4 million barrels in the week ending Sept. 15, the second drop in as many weeks.

Oil prices may climb if data shows inventory levels continued to decline last week. API will release estimates of last week's inventory levels after the market closes Tuesday. The

Department of Energy

, which is often looked at for confirmation of API's data, will release its figures for last week on Wednesday morning.

However, the release of the U.S. oil reserves next month also accompanies a planned production increase by OPEC which kicks in on Oct. 1, and should help boost oil supply levels over the next several weeks.

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 likely to result in a net daily increase of 100,000 to 300,000 additional barrels -- far short of OPEC's goal of 800,000 additional barrels a day -- since many OPEC members are already producing at or above capacity.

Tim Evans, senior energy analyst at

Pegasus-IFR

, said the release of the U.S. reserves may actually complicate OPEC's decision-making process in November.

Under a price band mechanism set up this summer, OPEC members informally agreed to boost output by a half-million barrels a day should the price of its "basket" (which includes blends from Algeria, Indonesia, Saudi Arabia and Venezuela) climb above its target band of $22 a barrel to $28 a barrel for 20 consecutive days. That occurred just before its meeting two weeks ago, but Evans said "it is far from certain" that prices will remain this high in November.