Oil Falls as U.S. Will Use Emergency Reserves; Gasoline Rises

Crude oil fell, dropping below $70 a barrel, after U.S. Energy Secretary Samuel Bodman said the government will use its emergency oil reserves to compensate for disruptions from Hurricane Katrina in the Gulf of Mexico.

Bodman in a statement today said the decision was approved last night and the government is reviewing applications for crude. Gasoline futures reached a record for a third day after Katrina paralyzed U.S. refineries along the Gulf of Mexico coast, forcing wholesalers to ration fuel.

``It certainly has got to have a dampening effect'' on crude prices, said Tony Machacek, a broker at Bache Financial Ltd. in London. ``It will help, but whether it's enough to keep the market down in the long term remains to be seen. It won't help a lot in terms of oil products'' such as gasoline.

Crude oil for October delivery fell as much as 90 cents, or 1.3 percent, to $68.91 a barrel and was down 66 cents on the New York Mercantile Exchange at 1:06 p.m. London time. Oil has jumped 65 percent in the past year, after reaching a record $70.85 yesterday.

``You have an oil market that is quite tight in the products side, particularly in the U.S.,'' said Robert Mabro, president of the U.K.-based Oxford Institute for Energy Studies. ``Then you have a hurricane which closed eight refineries. The market looks at the situation and realizes supplies are even tighter. Prices will only fall if demand declines.''

Gasoline for September rose as much as 3.4 percent on Nymex to an all-time high of $2.57 a gallon after surging 21 percent yesterday. Natural gas reached a record $12.30 per million British thermal units and was trading up 3.8 percent at $12.099.

Hundreds Dead

Katrina's death toll may reach into the hundreds. Looting broke out in New Orleans, where the National Guard patrolled the streets in a bid to preserve order. Gasoline and diesel tanks ran dry at some terminals in the Midwest, South and Southeast as refiners and wholesalers across most of the U.S. started rationing deliveries to filling stations and convenience stores.

BP Plc, Royal Dutch Shell Plc and other oil companies sent helicopter crews to assess damage to the nation's most important oil and gas producing region. Shell said its Mars platform, which can pump 15 percent of the U.S. Gulf's crude oil, was damaged by Katrina on Aug. 29.

U.S. gasoline prices at the pump yesterday rose to a record, averaging $2.619 a gallon, according to the AAA. They are set to rise further as the price surge caused by the hurricane filters through to retail prices.

In the past five years, pump prices have averaged about 62 cents higher than Nymex futures, Bloomberg data show. Based on today's record futures price, the average cost to U.S. consumers may reach $3.19 a gallon.

Wholesale gasoline prices surged 68 cents, or 28 percent, to $3.1245 a gallon yesterday at Gulf Coast terminals, according to data compiled by Bloomberg. In Chicago, wholesale prices jumped 61 cents to $2.9497 a gallon.

Refineries Shut

The total refining capacity shut is at least 1.79 million barrels a day. The cumulative loss in refined products may be at least 30 million barrels a day, or a day and a half of U.S. demand, said Deborah White, an economist at Societe Generale SA.

``Even if there's no damage, it's going to take at least two weeks for refineries to come back,'' White said in an interview from Paris. ``It's at least as serious as Hurricane Ivan, which we had last year. And it took six months to get production back to normal in that case.''

Oil prices gained 22 percent in the month after Hurricane Ivan damaged oil rigs, ripped up undersea pipelines and blocked with silt the ports oil companies use to supply and maintain facilities in the Gulf.

Gulf Production

U.S. production in the Gulf of Mexico is usually about 1.5 million barrels a day, according to the country's Minerals Management Service. Adding the 3.5 million barrels a day Mexico pumps in the region brings the total to 5 million barrels a day, or about 6 percent of global output.

The disruptions caused by Katrina may make it harder for refiners to stockpile winter fuels in preparation for a fourth- quarter peak in demand.

U.S. crude stockpiles probably rose by 1 million barrels last week, before Katrina pounded the Gulf, according to the median forecast of 14 analysts surveyed by Bloomberg. Distillates, mostly winter fuels including heating oil and diesel, may have increased by 1.5 million barrels. Gasoline supplies probably dropped by 1.63 million barrels.

The U.S. Energy Department will publish its weekly report on petroleum inventories at 10:30 a.m. Washington time.