I've been using the iOS 5 betas and I can tell you I use Reading List and Instapaper completely differently. Instapaper has always been long form reading, stored for later (and potentially offline). Reading List, I use to quickly transfer a site I'm currently reading from my desktop to my iPad or iPhone, incidentally replacing an app I wrote to do exactly that. I guess it's time to take Panic's Audion advice and retire that app ("When you double click the competition in the morning, that's a pretty good sign that it's time to hang up your hat!", http://panic.com/extras/audionstory/)

The Reading List is just a folder named "Reading List" within your Bookmarks folder; anything that can create a bookmark can add something to it. (It's actually all your bookmarks that are iCloud-synced, not just the reading list.) I imagine there are a bunch of apps with code for an "Add to Reading List" button already written but #define'd out until iOS5 is released, to avoid confusing people who press it and don't get any syncing.

And Instapaper works offline.

Probably because Apple's adding Reading List, an Instapaper-lite clone.

However, Marco's said he's "cautiously optimistic" that it will actually drive up the number of users of Instapaper.

http://www.marco.org/2011/06/06/safari-reader-and-instapaper