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[Fair Use: For Educational/Research Purposes Only]

Tuesday December 7, 1999

Oil refiners struggle with Y2K inventories

By Timna Tanners

LOS ANGELES, Dec 7 (Reuters) - Worries about a potential run on gasoline stations just before the New Year have created an odd inventory headache for refiners, which usually draw down stocks at year-end for tax and accounting reasons.

Oil refineries are grappling more than usual with the flip of the calendar over the right level for year-end inventories, torn between keeping normal minimum supplies or boosting reserves to avoid possible Y2K glitches or consumer runs on gasoline.

Typically, refiners reduce oil and gasoline stocks at year-end for tax and accounting-related issues.

Holding large amounts of inventory means companies have cash tied up and might not be operating efficiently. Moreover, this year, inventory costs are especially high as oil prices have doubled from year-ago levels.

But Y2K computer concerns have some refiners defying their accountants and preparing for any last-minute adjustments for failed computers and stockpiling supplies for any consumer panic. Two recent polls showed 28 percent to 40 percent of Americans will fill their gasoline tanks before the New Year.

``It's a Catch 22. All told, they want low end-of-the-year inventories, but they don't want to be the service station on the news with the 'Out of Gas' sign,'' one West Coast products trader said.

Market analysts said refiners appear likely to keep extra oil product stocks close at hand but away from the refinery. They also may be keeping extra stocks in alternative locations like pipeline facilities, and some major oil companies already have made deals to have smaller firms hold stocks temporarily, analysts said.

``Given the choice, they would obviously dump all of their inventories, but forced with the reality of the circumstances, they are tending to carry a little more inventory at the end of the year than they would have planned a year ago,'' analyst Rob Harvan at Honeywell/Bonner & Moore said.

The stockpiling of fuels has been reflected in strong demand and higher prices for oil products on the New York Mercantile Exchange (NYMEX), analysts said. Gasoline futures prices have strengthened more than 7 cents a gallon in the past month to 70.25 cents.

For oil stocks, refiners want to achieve a delicate balance between buying oil before prices rise, as some companies fear they will, and not dipping into a tax accounting convention that keeps year-ago supplies of cheaper crude on the books.

An accounting method used by most firms for tax reporting, called ``Last in, first out'' or LIFO, means companies accumulate ``layers'' of crude oil remaining from past years. That is complicated this year by the fact that oil prices have more than doubled over last year's levels.

If inventory reserves fall below 1999 levels, the company dips into the 1998 layer of oil stocks, which are priced at the average $11-a-barrel market prices at the end of 1998.

Since New York oil prices stand at about $26 a barrel now, the company would incur a tax gain on its books.

``People want to keep stocks at a minimum, but don't want to dip into those LIFO layers because with the cheaper oil, they would incur huge taxes,'' Purvin & Gertz senior principal Ken Miller said.

Inventory policy is likely to vary, depending on the refiner and its proximity to sources of oil, analysts said.

Indeed, some refiners said they were sticking with ``business as usual,'' without concerns over potential operation failures due to the Y2K computer bug problem.

``We're not going to be doing anything unusual. Stockpiling oil or gasoline for Y2K does not make economic sense,'' one oil trader said.

URL: http://biz.yahoo.com/rf/991207/62.html

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-- snooze button (alarmclock_2000@yahoo.com), December 08, 1999

Answers

Again, I would mention that if everyone waits until the last minute to fill-up, the stations will run out of product. There may be adequate supplies at the refinery and terminal levels but there is a limited number of tanker trucks to deliver to the stations.

-- rb (ronbanks_2000@yahoo.com), December 08, 1999.

``We're not going to be doing anything unusual. Stockpiling oil or gasoline for Y2K does not make economic sense,'' one oil trader said.

Did y'all catch that? DOES NOT MAKE ECONOMIC SENSE !! Thats about 85% of the y2k problem, I think!!

Taz

-- Taz (Tassi123@aol.com), December 08, 1999.