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Strategic Reserve Loaded With Less Attractive Grade of Crude With AM-Gulf-Oil Prices

January 30, 1991

NEW YORK (AP) _ The country’s strategic reserve of crude oil is loaded with hard-to-refine ″sour″ crude that has been unpopular among bidders the two times President Bush has ordered the stockpile tapped during the Persian Gulf crisis.

Industry analysts say it was perhaps poor planning that led the government to spend years filling about two-thirds of the U.S. Strategic Petroleum Reserve with the high-sulfur oil, largely because it was cheaper.

The government says its crude oil is not all that bad, although it realized last year there was an imbalance in the types of crude purchased. It then began trying to buy more high-quality, low-sulfur oil.

The reserve contains more than 580 million barrels of crude oil that is stored in salt caverns in Texas and Louisiana.

When President Bush decided to tap 5 million barrels this fall in a test that was at least partially intended to calm the oil futures market, some 800,000 barrels of high-sulfur, or ″sour,″ crude oil went unclaimed. Oil companies bought all of the low-sulfur, or ″sweet,″ crude oil, which is much easier to refine into gasoline and other products.

Shortly after the allied attacks on Iraq began Jan. 17, Bush said he would release 33.75 million barrels of SPR crude, consisting of 11.25 million barrels of sweet and 22.5 million barrels of sour.

The Energy Department said this week that oil companies had submitted bids for 27.9 million barrels of sweet crude, more than twice the amount available, but only 16.9 million barrels of sour crude. The department said Tuesday it might decide to sell more sweet crude, but that still would leave 5.6 million barrels of sour crude that nobody wanted.

Industry analysts said the preponderance of sour crude in the salt caverns shows that the SPR oil purchases weren’t well thought out.

″It does show that our planning was not as good as it could have been,″ said Thomas P. Blakeslee, an energy analyst with Pegasus Econometric Group Inc., in Hoboken, N.J. ″The sour crude is a cheaper crude and they just wanted to fill up those domes with whatever they could. You get what you pay for.″

″Always, the sour will be a less desirable crude, because it’s more difficult to refine,″ said Ann-Louise Hittle, a senior oil analyst with Shearson Lehman Brothers Inc.

The lower cost of the sour crude indeed was a factor in its purchase, said an Energy Department spokesman who refused to be identified.

″That’s part of it,″ he said. ″We bought an awful lot from Mexico and that was primarily sour. There were less transportation costs. The price was good. It helped Mexico a little bit, too, with their debts.″

Last January, the Energy Department began looking for more sweet crude.

″We’ll go back to putting in the sweet primarily,″ the spokesman said.

The sour crude still can be used by quite a few refineries, he said.

″Our sour is a little bit sweeter than most industry sours,″ the spokesman said. He acknowledged he was not able to come up with specifics on the sulfur content, however.

Sour crude’s hard times are not only occurring in the SPR sales.

London’s oil futures market, the International Petroleum Exchange, began offering futures contracts for Dubai crude, a sour blend, last summer. IPE officials were not able to say Tuesday how long it had been since even one barrel of the Dubai had been traded.

No Dubai deals have been made on the IPE during 1991.

″The amount of trading that is going on in the Dubai contracts has shrunk considerably,″ IPE marketing director Alastair Harris said.

″The Dubai futures are a dud,″ Hittle agreed.

Dubai futures are also traded on the Singapore Mercantile Exchange, or at least they are offered there each day.

When the allied bombs began falling on Iraq nearly two weeks ago, the New York and London futures markets were closed. Some traders tuned into the Simex, as they call the Singapore exchange, to see if they could get any clues on what might happen when London opened in a few hours.

″It was pretty funny,″ Hittle said. ″A couple of bids and offers came in, but because of a lack of liquidity, nothing happened. No deals were done, at least by the time I left at midnight.″

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