07.01.2003

LONDON - World oil prices pulled back from two-year highs on Monday (GMT) when big producing countries came out in favour of a hefty output hike to cover lost supplies from Venezuela, where a strike entered its sixth week.

Kuwait and Russia said oil powers should release up to 1.5 million barrels per day (bpd) of extra supply to cool the rally that has lifted prices by a quarter in two months.

International benchmark Brent crude oil fell 22 cents to US$30.55 a barrel, while US crude futures dropped 65 cents to US$32.43. Both markers are within US$2 of two-year highs and have already caused pump price hikes in the West.

"Prices are off after a big rise during Christmas and New Year," said Richard Savage of Bank of America. "With uncertainty over the Venezuelan strike and Opec's response, I would expect volatile trade over the next few days."

The strike in Venezuela, aimed at toppling President Hugo Chavez, has withdrawn more than two million barrels per day from world markets and drained US stockpiles to near their lowest levels in 26 years.

Russian Energy Minister Igor Yusufov, in Kuwait on a tour of Gulf oil states, saw the need for one to 1.5 million bpd of extra oil on world markets.

Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah echoed this estimate.

"Opec could do one to 1.5 million (bpd of extra output) and hopefully non-Opec can contribute some of that," Sheikh Ahmad told Reuters.

Russia, Norway and Mexico are the three largest oil exporters outside Opec, which is dominated by Gulf states, but all three are already pumping close to full capacity.

Opec President Abdullah al-Attiyah said that the 11-member group was determined to use an informal mechanism to trigger a supply hike by January 15 if prices stay up.

Attiyah said consultations were continuing about the volume of any output hike.

Opec's mechanism is designed to keep its reference basket of crudes in a range of US$22-US$28 a barrel but the basket stood at US$30.83 on Friday.

Asked if Russia had any spare capacity and whether it would be willing to raise output, Yusufov said: "We would prefer not to because we have certain programmes scheduled, but we are ready to raise production if necessary."

Extra supply from Opec, which controls two-thirds of world exports, would go some way to cooling prices, but traders said markets were unlikely to fall heavily until the threat of war on Iraq subsided.

The Bush administration is putting together a plan for a post-Saddam Hussein Iraq that would involve an extended American military presence and use of oil revenues to feed the people, Washington officials said on Monday. Reuters

• REUTERS

Reuters, 01.06.03, 12:44 PM ET By Hugh Bronstein

NEW YORK, Jan 6 (Reuters) - Brazilian sovereign bonds shot higher on Monday as investors returned from their winter holidays, took a fresh look at Brazil's new president, the former hard left union boss Luiz Inacio Lula da Silva, and liked what they saw.

Since winning October's election and being sworn in last week, Lula has increased his appeal on Wall Street by appointing a confidence-inspiring Cabinet and promising not to bust the budget in his quest to help the poor.

"In the short term people are feeling positive about Brazil because, so far, Lula has said and done the right things," said Americo DaCorte, managing partner at Latin World Asset Management in New York.

Benchmark Brazil C bonds <BRAZILC=RR> rose 1-7/8 to bid 70. The bonds have risen more than 20 points from the depths of last summer when fear of Lula was at its highest, based on his notoriety among investors for once advocating default in order to steer money toward the needy.

"In Brazil there are more buyers than sellers even at these higher levels," said one emerging debt trader. Brazil C bonds started last year trading in the high 70s before election-related uncertainty took its toll.

The Lula government has pledged to place pension reform high on the agenda when Congress reconvenes in February; music to Wall Street's ears as Brazil's bloated social security system is one of the greatest drains on its public finances.

"People are putting their money into countries that they think are going to do the right thing," DaCorte said. "And as of today, Jan. 6, people believe that Brazil is going to do the right thing."

Lula, who was once jailed for his opposition to Brazil's 1964-1985 military dictatorship, won this year's campaign after steering his rhetoric toward the political center. Also contributing to his win, Lula refused to participate in the country's notoriously negative campaigning, dubbing himself the candidate of "peace and love."

PEACE AND LOVE IN BRAZIL, NEITHER IN VENEZUELA Venezuela bonds meanwhile traded flat to lower -- with total returns edging down by 0.9 percent -- as a five-week-old national strike ate into the nation's economy and investor confidence.

"The longer the crisis goes on the more you have to believe that the ability as well as the willingness of the government to pay (its bond service) is going to be affected," DaCorte said. "It's a deteriorating situation."

Venezuelan President Hugo Chavez has vowed to punish opposition strikers for crippling the country's oil industry. His opponents, who demand that he resign and hold early elections, have pledged no letup in the conflict, which has plunged the world's No. 5 oil exporter into economic chaos.

Chavez was democratically elected in 1998 vowing to wrest control from the country's corrupt elite and enact reforms to help the poor. But opposition has grown amid charges the president wants to establish a Cuban-styled authoritarian state.

Merrill Lynch on Monday cut its allocation of Venezuelan bonds to underweight from market weight in its model portfolio, suggesting investors increase allocations to Ecuador, an oil producer benefiting from higher world crude prices.

Ecuador bonds got a boost on Friday when the incoming government of Lucio Gutierrez named respected economic consultant Mauricio Pozo as finance minister, a move seen by analysts as opening the door to a much-needed International Monetary Fund deal.

"The announcement of the finance minister last week is still drawing money into Ecuador," one emerging debt trader said.

By Chris Baltimore 06 Jan 2003 17:39

WASHINGTON, Jan 6 (Reuters) - The U.S. Energy Department on Monday said it has allowed oil companies to defer delivery of 3.1 million barrels of crude oil to the Strategic Petroleum Reserve until the end of September, citing concerns about an ongoing strike in Venezuela.

On Friday, Energy Secretary Spencer Abraham agreed "to allow companies that owe oil to the SPR due in February to enter into negotiations with the DOE to defer those deliveries until a later date," a department spokesman told Reuters. The deliveries would be due by Sept. 30, which is the end of fiscal 2003, the spokesman said.

Companies that received the deferrals asked not to be identified, the spokesman said.

In a similar move, the DOE last year agreed to allow oil companies to defer deliveries to the SPR due in December and January until the end of September. Oil companies will pay in-kind interest on the deferred deliveries.

The DOE action will "help ensure that the deliveries will not negatively affect the oil market while still providing for the energy security of the United States," the spokesman said.

The DOE said it is is closely monitoring a crippling strike in Venezuela, which extended onto its sixth week, sidelining the fourth-biggest U.S. oil supplier.

The strike in Venezuela, which held exports at one fifth of normal levels last week, has drained U.S. stockpiles to near their lowest levels in 26 years.

But the agency so far has not allowed any releases from the SPR to counter the Venezuela strike. Such an action would only come because of a "imminent and severe supply disruption," he said.

The reserve currently holds 599 million barrels of oil, the highest level in its history, DOE said.

The Joplin Globe - 1/6/03 The Associated Press

WASHINGTON - If the United States invades Iraq, there could be oil shortages and lines at gas stations - or an oil glut and falling prices.

Much depends on whether American troops can secure Iraqi oil fields and whether other producers continue the flow of oil uninterrupted.

In the growing drumbeat over war with Iraq, the Bush administration rarely mentions oil, even though Iraq has one-tenth of the world's oil reserves. But a military campaign almost certainly will have a major impact on world markets.

In the event of a war, Secretary of State Colin Powell said recently, "We would want to protect those fields and make sure that they're not destroyed or damaged by a failing regime on the way out the door."

The growing prospect of war, combined with the monthlong political strife in Venezuela that is hamstringing that country's oil production, already has caused unease among energy traders.

Last week, prices for crude to be delivered in February jumped to more than $33 a barrel, 65 percent higher than a year ago. The average price of gasoline has risen steadily to more than $1.40 a gallon. On Dec. 26, pump prices in several cities jumped by as much as 20 cents a gallon overnight.

World oil stocks have been tight and fell sharply last week, the Energy Department says.

"The loss of Venezuelan oil is beginning to hurt," says Robert Ebel of the Center for Strategic and International Studies. "What people are beginning to worry about is, suppose the loss of Venezuelan oil continues when we intervene in Iraq."

Together, Iraq and Venezuela produce about 5 million barrels a day. Ebel and other energy experts wonder whether increased production from other countries will be able to make up such a shortfall.

With global production at about 76 million barrels daily, a loss of several million barrels could cause prices to soar, economists say. U.S. officials emphasize that oil markets have changed dramatically since the 1970s, when Mideast supply disruptions led to fuel rationing, high prices and long lines at gas pumps.

Nearly 4 billion barrels of oil are in emergency stocks worldwide, including nearly 600 million barrels in a U.S. reserve. If withdrawn at 2 million barrels a day, the U.S. stocks could counter a disruption of 286 days, the administration told Congress this past summer.

"It's premature to say we're heading for any price spiral up or down," says Yasser Elguindi, an analyst with Medley Global Advisors in New York. "We have to see what kind of conflict emerges."

Among the scenarios outlined by economists: President Saddam Hussein's government falls quickly, the Iraqi oil fields remain intact and the country's already dwindling oil exports - about 2 million barrels a day - disappear for a few months. Venezuela's exports resume and other countries, led by Saudi Arabia, boost production to make up any losses.

Prices briefly spike, as they did in the onset of the Gulf war in 1991, to more than $40 a barrel, but within three months recede to normal levels or even lower with supplies plentiful.

An invasion meets stiff resistance, Iraqi oil fields are set aflame, production is disrupted elsewhere in the Persian Gulf, global supplies fall by 6 million barrels a day. Emergency stocks cannot close the gap.

In such a case, oil prices could climb to $80 a barrel and stay above $40 well into 2004, halting the U.S. economic recovery and triggering a global recession, according to Ebel, whose group has mapped out a range of scenarios. There is gas rationing and lines at service stations.

George Perry, a Brookings Institution economist, analyzed a similar possibility and forecast a potential loss of 7 million barrels a day, a tripling of crude prices and $3 per gallon gasoline.

From all indications, the administration believes Saddam can be toppled without severe impact to oil flow, and some officials have even suggested clear, long-term economic benefit.

With Saddam gone, "you could add 3 million to 5 million barrels of production to world supplies," Larry Lindsey, then Bush's top economic adviser, said in September, suggesting a successful war "would be good for the economy."

The White House retreated from the comment and Lindsey was later replaced.

Economists agree that a revitalization of Iraq's decimated oil industry in a post-Saddam, more pro-Western atmosphere, could have lasting impact on global markets.

"A quick victory in Iraq followed by relative stability in the region could lead to increases in oil production capacity in Iraq, Iran and other countries, putting downward pressure on oil prices," Yale economist William Nordhaus recently wrote.

Iraqi oil experts maintain production could reach 3 million barrels a day within a year and double that in a decade - claims viewed by many as overly optimistic.

"When people talk about Iraq, there are so many unknowns," says John Felmy, chief economist of the American Petroleum Institute. "We haven't been in the country for years."

It is estimated that it would take billions of dollars to get Iraq's oil industry into shape where production could be expanded significantly.

Reuters, 01.06.03, 12:10 PM ET

CARACAS, Venezuela (Reuters) - Venezuela's government said it was making progress on Monday in breaking an oil export "blockade" caused by a 36-day strike by foes of President Hugo Chavez.

"In fact, there was (a blockade). What we are doing is unblocking it," Venezuelan oil minister Rafael Ramirez said in a Monday morning television interview.

Ramirez said that maritime companies that joined the strike and hindered ship loadings would be replaced in efforts to boost oil sales that account for half of government revenues.

International shipments last week by the world's No. 5 crude exporter were flat with the previous week at 500,000 barrels per day (bpd), according to calculations made by Reuters using data from shippers and state oil firm Petroleos de Venezuela (PDVSA). The OPEC nation had exported nearly 2.7 million bpd of crude and products in November, and the disruption in Venezuela, which normally provides over 13 percent of U.S. daily imports, sent oil prices near two-year highs over $33 a barrel last week.

Chavez said in a late Sunday national television address that the government was winning the battle for PDVSA. Rebel PDVSA employees say oil output has been cut to less than 200,000 bpd from 3.1 million bpd, while the government said it is at 600,000 bpd and will double in the next week.

"As of today, exports rose to 1.5 million bpd," the Populist leader said. Independent shippers reported that Venezuela loaded just over 1.3 million barrels of crude on Sunday for export in three tankers.

Of the crude loaded, 350,000 barrels were dispatched to the nearby island of Bonaire, while the German Sun carrying 450,000 barrels of crude sailed for the United States, shippers said. The PDVSA-owned Hero, laden with 520,000 barrels of crude for Lake Charles in the United States, was expected to depart Monday morning.

Only ships chartered by PDVSA and U.S. refining affiliate Citgo have loaded, as foreign firms have hesitated to have vessels attended by uncertified replacement crews hired by the government.

The government has said it will use the strike to clean up PDVSA and hire workers aligned with the interests of the state. Striking PDVSA employees have said they will not return to work until Chavez is out of office or until early elections are called, and that replacement workers will not be able to restart the industry. Oil minister Ramirez said that oil executives fired during the work stoppage would not be rehired.