By Carola Hoyos in New York Published: January 9 2003 4:00 | Last Updated: January 9 2003 4:00

Additional crude oil is already reaching markets affected by the shortfall in Venezuelan supplies, storage data revealed yesterday.

The news sent world oil prices lower for a third straight day this week and prompted some analysts to predict that the Opec oil cartel would raise its 23m barrel-per-day output ceiling in line with current production at this Sunday's meeting in Vienna, rather than substantially increase production.

"Output is already there, that's what the inventory data is telling us. Opec is going to confirm what has already taken place," said Adam Sieminski, analyst at Deutsche Bank. "The market is now balanced and the loss of Venezuela has been made up."

Crude oil imports into the US rose 658,000 barrels to 8.3m b/d, according to Department of Energy statistics. The department does not furnish data breaking down by country weekly US imports, but some analysts speculated that Saudi Arabia may have tapped into its crude storage in the Cari-bbean.

Benchmark crude oil prices in London and in New York, yesterday fell to less than $30 a barrel, which could push Opec's crude oil basket below $28 a barrel - within its $22-$28 target band - for the first time in more than two weeks.

At midday the Nymex February contract price had recovered slightly and was trading at $30.35, down 73c, while London's IPE Brent contract traded at $28.37, down 96c, in reaction to the bearish inventory data.

The US Department of Energy said the country's crude stocks rose 400,000 barrels to 278.7m barrels for the week to January 3, defying expectations of a 5m-6m barrel reduction.

Despite the unexpected data, analysts warned that storage levels remained at historic lows and that the possibility of a war with Iraq meant that prices were unlikely to fall much more than to the middle of Opec's $22-$28 range.

Nevertheless, some more bearish market observers warned that Opec could not forget about the underlying seasonal drop in demand for crude oil expected in the first two quarters of the year.

Opec yesterday confirmed that it would hold an emergency meeting on Sunday in Vienna.

Sheikh Ahmed, Kuwait's oil minister, said yesterday that Kuwait supported a rise in Opec production of about 1m b/d, warning that his country was unlikely to be able to increase its production because of ongoing industry repairs.

"Increasing production by 1m b/d is reasonable and enough to stabilise the oil market," he said.

Non-Opec producers, such as Russia and Norway, have also said that they are already producing at close to maximum capacity.

Saudi Arabia, Opec's biggest producer, and Qatar, the group's president this year, want to agree an increase of at least 1.5m, but much of this may already be reaching consumers, analysts said.

Opec promised to reduce its production at its last meeting in December, but traders say those cuts were never fully implemented because of the growing realisation that the Venezuelan strike would not be resolved quickly.

"I don't think they ever cut," Mr Sieminski said.

In Washington, a State Department official said that a substantial increase in Opec output would be "a positive development".

09.01.2003 3.26 pm

CARACAS, VENEZUELA - Venezuelan bank workers on Wednesday called a 48-hour shutdown of banking services this week, escalating a five-week opposition strike that has already crippled the country's vital oil exports.

The bank stoppage call spooked Venezuela's currency market, sending the local bolivar tumbling against the United States dollar.

Union leaders said the action by employees at private and state banks across the South American nation would halt services to the public on Thursday and Friday.

"We are calling for a complete banking stoppage," Jose Elias Torres, president of the bank workers' union federation Fetrabanca, told a news conference in Caracas.

Fetrabanca called the work stoppage in support of the gruelling strike launched by opposition leaders on December 2 to press leftist President Hugo Chavez to resign and hold early elections. The ongoing shutdown has crippled oil output and shipments by the world's No 5 petroleum exporter.

The Venezuelan Central Bank's bolivar reference rate against the US dollar closed 5.7 per cent down at 1507/1510.50 bolivars. The local currency's interbank rate slid by nearly 10 per cent against the US greenback to an average low of 1585 bolivars, traders said.

As the opposition's economic offensive against the populist president increased, so too did tension on the streets.

National Guard troops fired tear gas on Wednesday to keep back stone-throwing Chavez supporters who besieged the National Electoral Council in Caracas, where opposition leaders were holding a news conference. No injuries were reported.

The oil cartel that sparked recession in the 70s is now cast as an economic cavalry

Larry Elliott and Charlotte Denny Thursday January 9, 2003 The Guardian

Thirty years ago, the idea of Opec meeting as the world was planning war in the Middle East would have sent shivers down the spine of the markets. But at this Sunday's assembly in Vienna, the 11-member oil producers' cartel will be playing the role of John Wayne riding to the rescue of the world economy.

As oil prices last week surged well above $30 a barrel to their highest level for two years, Saudi Arabia - the world's largest oil producer - let it be known it was prepared to back an extra 2m barrels a day production for the world's energy supplies. The announcement provided immediate relief to a jittery market: prices fell by more than a dollar.

The Opec meeting has been called to discuss the Saudi plan. Opposition from the rest of the cartel could mean a smaller boost to production but, as the only producer with significant spare capacity, the Saudis hold all the important cards.

Kuwait's oil minister, Sheikh Ahmad al-Fahd al-Sabah, said yesterday an increase of between one and 1.5 million barrels per day was the most likely outcome. This would add between 4% and 7% to Opec's 23 million barrels a day production.

It's all a far cry from 1973, when the launch of the Yom Kippur war sparked an Arab boycott of the western states supporting Israel. Oil prices soared fourfold to $11, killing off the long post-war boom in the west that had seen record increases in living standards. A second price increase at the end of the 1970s and a third at the time of Iraq's invasion of Kuwait in 1990 had the same outcome - recession in the west accompanied by a period of falling oil prices.

Both Opec and the west have learned from the past three decades' destabilising shocks that a managed market makes sense for exporters and for importers. Despite the arrival on the scene of new, non-Opec producers like Russia, the members of the Opec cartel still account for 40% of world output. More to the point, the Saudis are the linchpin not just of the cartel but of the whole oil market.

"Non-Opec countries tend to run always at full capacity and so the spare capacity is almost entirely in Opec countries", said Paul Horsnell, an oil analyst at JP Morgan. "While there is a common perception that Russia in particular could somehow help, the reality is that they cannot."

Two factors account for the price of oil rising above $30 a barrel at the turn of the year. First, the drum beats of war from Washington grew louder, raising fears that early 2003 would see the long threatened US-led attack on Iraq. Secondly, a strike paralysed Venezuela's refineries, cutting off supplies from the world's fifth biggest oil exporter and the source of 13% of America's oil imports.

These factors pushed prices well above the $22-28 a barrel price band that Opec believes guarantees a decent return for producers without strangling the global economy. At the present juncture, with the US, Europe and Japan all struggling, cheap energy is regarded by economists as a crucial ingredient for recovery.

Paradoxically, the Saudis seem more concerned about the impact of a $30-plus a barrel price on the global economy than the Bush administration. If the White House ordered it, the US could draw down from its massive strategic reserves stashed away in four salt caverns in Texas and Louisiana. America's stockpile stands at an all time high of 600m barrels, enough to keep the world's biggest economy running for 60 days - even if all imports stopped overnight.

So far, Mr Bush has declined to turn on the taps - even though as a former oil man he knows how vital crude is for the American economy. The administration's own macroeconomic forecasters believe the US is robust enough to withstand a crude price of $30 a barrel - still well below its peak of the early 1980s once inflation is taken into account. Moreover, they point out that petrol prices at filling stations have increased by far less than the cost of crude would suggest.

Mr Horsnell says the White House is also wary of giving an open-ended commitment to fill the hole in the market left by the shutdown of Venezuela's oil industry, fearing that it could run down the reserves at a time when a far greater crisis is looming in the Persian Gulf.

Raiding the reserves now, before a shot has even been fired, would open the Republicans to the same charge they levelled at Bill Clinton in 2000 - that they were using a strategic economic weapon for political purposes.

The Americans, along with virtually every oil market analyst, are also assuming that a war - should it happen - will be short, sharp and decisive. A far more troubling eventuality would be Saddam Hussein not only removing Iraq's 2m barrels a day from the market but also launching successful strikes on ports in Kuwait and Saudia Arabia. Under those circumstances, analysts are convinced the price would quickly spiral.

Goldman Sachs has worked on a scenario under which oil supplies are disrupted by Iraqi attacks on Saudi and Kuwaiti fields, which would send the price to $50 a barrel and cut growth in 2004 from 2.4% to 1% in the US and from 1.9% to 1% in Euroland; but its analysts put the chance of this at only 15%.

But even a war that goes according to the Pentagon's plans may have some serious consequences for the oil market.

The dream scenario for Washington is that the ousting of Saddam Hussein is followed by the creation of its own Middle Eastern client state - which will ensure security of cheap supply of oil. By and large, this was what underwrote western prosperity in the golden decades of the 1950s and 1960s.

But cheap oil is a problem for the rest of the Middle East, particularly Saudi Arabia which, even though it is the world's lowest cost producer, needs an oil price of around $25 a barrel to generate the revenues to mollify its young and increasingly radical population.

The country has one of the world's highest birth rates, with half the people aged below 15. Every year a fresh cohort graduates into unemployment or dead end jobs in the bureaucracy, ideal recruits for Islamic fundamentalists.

The ruling Saud royal family - accutely aware that Saudi is a one-commodity economy - knows that a crash in oil prices could have disastrous political consequences at home.

This, ultimately, is the dilemma for the new generation of Opec doves. They have abondoned using oil as a political weapon, and have no intention of slapping boycotts on the US and the UK should the bombs start falling on Baghdad. But if they prove too compliant with America they may find their autocratic regimes under pressure from angry anti-west populations. Even Opec in its 1970s pomp would struggle to fix the oil price in those circumstances.

     Brazil's new President Luiz Inacio Lula da Silva is taking as a personal snub Washington's decision to send U.S. Trade Representative Robert B. Zoellick to Brasilia for his inauguration on Jan. 1. The Bush administration had sent "the subsecretary of a subsecretary of a subsecretary," Lula sniffed. In contrast, among the delegates from 191 nations present at the ceremony were Presidents Fidel Castro of Cuba, Venezuela's Hugo Chavez and South Africa's Thabo Mbeki. Spain sent the Prince of Asturias, heir to the throne.      -0-      Speaking of Lula, as he's commonly called, the CIA unit tasked to develop biographical profiles on all new international leaders to help Washington decision-makers formulate policy is going to have fun with the new Brazilian president. Among the interesting findings they have to evaluate is a July 1979 interview in the Brazilian edition of Playboy. Titled "Entrevista bomba: Lula o metalúrgico" ("Explosive interview: Lula the metallurgist"), the magazine detailed Lula's political views while running the Metalworkers Union. Lula expressed admiration for Hitler and Khomeini. "There are some figures that I admire very much, taking for granted Tiradentes (an early Brazilian fighter independence) and others that did a lot for the independence of Brazil and to better the conditions of the people....As for example, Hitler, who, even though he was wrong, he had that which I admire in a man, the fire of setting himself to achieve something and to go after it...I don't know much about Iran, but the strength that Khomeini showed, the determination to bring down the regime of the Shah, that was serious business." Lula tempered his comments by noting that he solely admired their political strength and dedication, but not their ideology.

08:45 PM EST Jan 08

CARACAS (AP) - Venezuela's currency reached a record low against the U.S. dollar Wednesday after banks said they will close for two days to support a 38-day-old strike seeking President Hugo Chavez's ouster.

Demand for dollars soared on speculation Chavez's government, facing a fiscal crisis because of dwindling oil and tax revenues, would devalue the bolivar to balance its budget. Nervous depositors wanted dollars before the banks closed, not knowing what the bolivar would be worth when banks reopen next week.

Jose Torres, president of Fetrabanca, the umbrella group for bank employees, said banks will shut down Thursday and Friday, adding weight to a strike that has dried up oil income in the world's fifth-largest oil exporter.

The bank strike underscored the intransigence of both sides, despite international pleas for them to help the Organization of American States negotiate a solution to the standoff.

The bolivar plunged by as much as 13 per cent before its official close at 1,510 bolivars to the dollar, down six per cent, said the Central Bank, which uses an average of all the day's trading prices. Previously the lowest close was 1,492 to the dollar on Sept. 15.

Earlier Wednesday, the government tried to raise money by offering 40.5 billion bolivars in government bonds, worth at $29 million US at that point. There were no takers.

National guardsmen fired tear gas Wednesday to disperse pro-Chavez street activists throwing objects at the National Elections Council building, where opposition leaders were holding a news conference.

The strike leaders are calling for a Feb. 2 non-binding referendum on Chavez's rule and want him to schedule an election in 30 days if he loses the referendum.

Chavez insists the constitution only requires him to respect a possible recall referendum next August, the midpoint of his six-year term.

Chavez has gone so far as to threaten nationalizing striking banks, which have opened just three hours a day since Dec. 9. Thousands line up each morning outside Caracas banks that are splattered with graffiti reading: "I want my money!" and "Banker thieves!"

Before Wednesday, the bolivar's value had fallen by more than 45 per cent since Chavez abandoned exchange controls last year to curb capital flight. Venezuela spent $6 billion US in 2001 to support the bolivar.

The strike briefly sent international oil prices above $30. The state oil company is seen as gradually picking up activity but is still operating well below normal. Crude output is estimated at about 400,000 barrels a day, compared with the pre-strike level of three million barrels a day. Exports, normally 2.5 million barrels a day, are at 500,000 barrels a day.

Chavez has managed to somewhat stabilize domestic gasoline supplies through imports. Caracas streets were jammed with traffic Wednesday and many businesses were open. However, international franchises, large malls and many factories were closed, emptying industrial parks. Public schools opened for the new year Monday but some private schools have delayed classes.

Three Venezuelan navy ships were collecting Colombian rice, beans and other staples to alleviate strike shortages in Venezuela.

Late Tuesday, Energy Minister Rafael Ramirez threatened to crush the strike by decentralizing the oil monopoly, where 30,000 workers are on strike.

Chavez's government will cut jobs at the Caracas headquarters of the company, a hotbed of dissent where 7,000 are employed, Ramirez said. His government is systematically firing strikers at the giant company.

The strike has all but shut Venezuela's oil industry, which contributes one-half of government income. Other revenue is down because thousands of businesses closed, affecting tax collection. The government is cutting its 2003 budget by 10 per cent.