US considers tapping strategic reserves as oil hits new highs

The US government revealed yesterday it was considering the unusual step of dipping into its strategic oil reserves as crude prices hit a fresh all-time high.

The US government revealed yesterday it was considering the unusual step of dipping into its strategic oil reserves as crude prices hit a fresh all-time high.

In a move that will be seen as political opportunism just six weeks ahead of a presidential election, the White House said the move would be in response to supply disruptions caused by Hurricane Ivan.

The decision came as crude prices in London surged to a record high of $45.75 a barrel before settling at $45.13, up 20 cents, amid mounting concern that the bad weather would disrupt US production and refining operations. In New York prices rose briefly to $49 before settling up 11 cents at $48.46.

According to one report, the government will make loans for two to three weeks, with one for between 100,000 and 200,000 barrels, and another for 1 million to 2 million.

Scott McClellan, a White House spokesman, said the administration was considering a request from refiners to borrow oil from the Strategic Petroleum Reserve (SPR).

He said the requests were for "small quantities" and a "short period of time," and declined to be more specific. The administration last released oil from the reserve in October 2002 after Hurricane Lili, when it loaned 296,000 barrels to a unit of Shell to help with disruptions to pipeline shipments.

Oil prices initially fell as rumours of the request filtered through before rising as analysts focused on the implications for the markets of the disruptions.

Ray Attrill, a director of research at 4Cast, said: "The market is still taking the view that the weather will have a more durable impact. There will have to be a lot more where that came from if they want to take the speculative froth off the market."

The Bush administration has repeatedly made it clear that the SPR will be used only if there is a severe disruption of supply. Dick Cheney, the vice president, has defined severe disruption as the loss of about 5 to 6 million barrels a day of US oil imports.

Paul Mortimer-Lee, an economist at BNP Paribas, said using the SPR would be "politically tempting". "The current loss does not meet Cheney's definition of severe disruption of supplies, but lots of things look more fluid close to elections," he said.

He said Bill Clinton had used oil from the SPR to bring heating oil costs down in 2000 just as people were filling up their tanks for the winter.

While most of speculative interest is in contracts for future deliveries, Goldman Sachs and Morgan Stanley, the US investment banks, are buying up physical oil stocks. Morgan Stanley recently won the contract to supply fuel to United Airlines, and Goldman Sachs recently bought 10 million barrels of oil.