Oil Prices Drop After Contracts Awarded for Stockpiled Crude

Updated from 1:25 p.m. EDT

Heating oil and crude oil prices fell sharply on Thursday, as news that the government had awarded contracts for all 30-million barrels of stockpiled crude oil offered to the refineries helped ease concerns of a winter supply shortage.

Midway through Thursday's session, the benchmark November contract for crude oil finished down 90 cents, or about 3%, at $30.53 a barrel on the New York Mercantile Exchange. The contract for November delivery of heating oil slid 3.6 cents, or 4%, to close at 92.72 cents.

The

Department of Energy

announced Wednesday afternoon that it had

awarded contracts to exchange the 30 million barrels of crude oil that

President Clinton

ordered

released nearly two weeks ago from the Strategic Petroleum Reserve. The 11 companies awarded the contracts have agreed to return more than 31.5 million barrels to the nation's reserves next spring.

Tim Evans, a senior energy analyst at

IFR-Pegasus

, said the contract awards for the stockpiled oil make it much more certain that inventories will continue to grow for the next six weeks or so, easing concerns of dwindling supplies. Data

released earlier this week showed crude oil stocks grew last week for the first time since early September.

"We're seeing a strong reaction because there's large degree of emotional disappointment in the market," Evans said. "It looks like the bulls will have to come up with some supportive news in a hurry in order to avert an even bigger price disappointment."

Industry analysts say traders had been pushing prices up in anticipation that the government might be forced to scale back or delay the planned release since several large refiners had indicated they would not be participating in the program.

But, Evans said, "confirmation that the full 30 million barrels would be booked and flowing into the market in November blew a very large hole in that theory."

The list of bid winners did include little-known names like Aurora, Colo.-based

Euell Energy

and Tallahassee, Fla.-based

Burhany Energy Enterprises

, each of which were awarded 3 million barrels of crude oil. But large companies like

BP Amoco

(BP) - Get Report

and

Valero Energy

(VLO) - Get Report

were also awarded contracts.

There have also been questions about how much of the crude oil released from the reserves would actually be turned into heating oil -- and when, as many refineries are already producing at or near capacity and have scheduled maintenance work on their plants over the next two months. The latest data estimated refineries were working at 94.4% to 97% of capacity last week. Fears of future heating oil shortages prompted many to begin buying heating oil now, pushing demand up.

Analysts at London-based

GNI Limited

estimated demand for heating oil is 14% higher now than average levels a year ago, at 4.06 million barrels a day. And the latest prices show an increase of nearly 50% over last year's levels. But demand is likely to drop off sharply as stocks increase, putting downward pressure on prices.

Concerns over heating oil supply levels grew earlier this week after the Department of Energy reported that distillate stocks, which include heating oil and diesel fuel, fell last week by 700,000 barrels. The industry group, the

American Petroleum Institute

, said its data showed stocks grew, but only by 336,000 barrels.

When he announced the contract awards Wednesday, Energy Secretary Bill Richardson assured consumers that the awarding of the oil released from the nation's strategic reserves would help increase heating oil inventories. "Every barrel we can get into the market in the next few weeks reduces the risk of a shortage of heating oil and diesel fuel this winter," Richardson said.

Still, analysts remain skeptical about the long-term effect the release from the oil reserves will have in reducing heating oil prices, questioning how much more heating oil U.S. refineries are capable of producing and whether that some of the heating oil may go to Europe, which relies heavily on the fuel and pays more than Americans for it.

"Mr. Richardson might find his short-term Band-Aid might end up as bad aid," wrote Phil Flynn, energy analyst at Chicago-based

Alaron Trading

, in a commentary Thursday.