cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 2:58 PM ET Jan. 22, 2003

NEW YORK (CBS.MW) -- Progress toward a resolution to Venezuela's eight-week strike pulled crude futures prices lower Wednesday, ending the commodity's six-session rise.

But doubts that an end to the strife would remedy tight oil inventories lingered.

The price of a barrel of crude for March delivery closed at $32.85, down 34 cents on the New York Mercantile Exchange. Prices had been climbing since Jan. 13.

The contract traded as high as $33.45, but fell as low as $32.65 during Wednesday's session. The February contract rose as high as $35.20 on its expiration day Tuesday, the highest since November 2000.

Also on Nymex, cold weather boosted demand for natural gas, lifting prices for the heating fuel to highs not seen in two years.

Gold futures closed just short of $360, taking cues from the U.S. stock market and developments in Iraq. See Metals Stocks.

Some of Venezuela's striking oil tanker pilots returned to work this week following a government deal to get back wages, according to Bloomberg News.

Leaders from the U.S. and five other democratic countries are expected to meet in Washington to discuss ways to help Venezuela end the standoff between President Hugo Chavez's supporters and the opposition.

Former U.S. President Jimmy Carter has traveled to Venezuela attempting to mediate the dispute, and proposed an election plan that both sides are studying.

But "despite all the talk of resolving the Venezuelan problem, I do not believe that there will be any easy solution soon," said Dailyfutures.com President Todd Hultman.

Even if the crisis were resolved tomorrow, it could take months for the oil industry to get production back to where it was before the strike, Hultman said.

John Mesrobian, president of Constantinople Advisors, said, "Pilots can go back to work but, who is pumping and producing the oil to pump into the empty tankers?"

Chavez' government has claimed that daily oil output is at around 1 million barrels, but strikers have said it's running at half that amount. Venezuela produced around 3 million barrels per day before the strike began.

Meanwhile, a Saudi Arabian ambassador to the U.S. said Wednesday that Saudi Arabia was prepared to raise its oil output if prices don't drop back below $28 in the next few weeks. He didn't, however, note how much of an increase the country, an OPEC member and the largest oil producer in the world, was willing to make.

OPEC agreed earlier this month to raise its member production by 1.5 million barrels, excluding Iraq, to 24.5 million barrel per day beginning Feb. 1 in an effort to offset oil lost due to Venezuela's strike.

Iraq stays in view

"While the situation in Venezuela is important to the crude oil market, the upcoming war with Iraq is having a far greater impact on prices and the anxiety that traders are feeling," said Hultman.

"War in the equation elevates the level of uncertainty to greater heights and makes forecasting impossible," he said.

U.N. weapons inspectors, which began their search for weapons of mass destruction just before Thanksgiving, will deliver a report on the search and any findings to the United Nations Monday.

The oil market questions just how high prices can go and for how long if a war does erupt and Iraqi President Saddam Hussein doesn't flee in exile peacefully, said Infinity Brokerage Services' head financial analyst John Person. "This is why there is a diplomatic party trying to intervene in Venezuela."

Historical moves

Even though crude prices slipped Wednesday, the commodity has shown amazing resilience in recent days and they're still up about $2 from the close on Jan. 10, when the six-session rise began.

Michael Armbruster, an analyst at Altavest.com, explained that the current situation in oil is unique.

Some traders view the recent run-up in crude futures as a repeat of 1990 to 1991 when prices "spiked over $41 in the weeks leading up to the Gulf War only to implode and drop all the way down to $17.45 one month after coalition forces defeated Iraq," he said.

But others believe that the fundamentals affecting oil this time around are different.

Non-strategic petroleum reserve supplies are at 27-year lows thanks to Venezuela and the Department of Energy has estimated that the minimal operational level of non-SPR oil stocks level is 270 million barrels, Armbruster said.

Last week's U.S. inventory data pegged oil stocks at 272 million barrels, "precariously close to the 270 million mark," he pointed out.

"The problem is that the trend toward tighter inventories is likely to continue in the weeks ahead even without a war with Iraq," he said. As a result, he expects oil prices to jump to $40 or above "before this bull market runs its course."

Updates on U.S. supplies from the American Petroleum Institute and Energy Department won't be released until Thursday morning, a day late due to Monday's Martin Luther King, Jr. holiday.

Tim Evans, IFR Pegasus' senior analyst, expects the data to reveal a decline of 1 million to 3 million barrels for the week that ended Jan. 17. He also expects that gasoline inventories rose between 2 million and 3 million barrels and distillates fell by 2 million to 3 million barrels in the latest week.

Ahead of the news, petroleum-product prices closed lower. February unleaded gasoline fell by 0.17 cent to 89.93 cents a gallon. February heating oil closed at 91.19 cents a gallon, up 1.72 cents.

Natural gas surge

Expectations for a hefty drop in last week's U.S. natural-gas supplies, along with the current cold weather in much of the country, lifted prices for the heating fuel to their highest level in two years.

February natural gas tacked on 24 cents to close at $5.673 per million British thermal units. The session's high of $5.74 took out the March 2001 high of $5.71 and the next highest level is the $7.10 seen in February 2001.

Fimat's Fitzpatrick said the market estimates that natural-gas supplies fell between 175 billion cubic feet to 210 billion cubic feet during the week ended Jan. 17. IFR Pegasus' Evans expects a fall of 170 billion to 210 billion cubic feet. Both analysts pointed out that if supplies fell by as much as the market predicts, the change will be a far cry from the 126 billion fall seen a year-ago.

The Energy Department will release its weekly supply report Thursday morning.

"Once the price reaction to this report is out of the way though, prices may have a chance to reverse meaningfully to the downside, provided the weather outlook is still bearish at that juncture," Evans said.

The current strength in natural-gas prices helped most oil-service stocks move higher. The Oil Service Index ($OSX: news, chart, profile) traded up 1.9 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at 244, up 0.8 percent amid gains in natural gas and gold futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

www.forbes.com Reuters, 01.22.03, 10:19 AM ET

SAO PAULO, Brazil, Jan 21 (Reuters) - Brazil's financial markets sagged on Wednesday as investors braced for the possibility of a U.S.-led war in Iraq and a resulting drop in interest in emerging markets.

On the home front, the market waited for the Central Bank to announce its first interest rate decision of the year. Most have been betting the 25 percent Selic benchmark rate would be held, but some said the odds had changed after the Central Bank relaxed 2003 inflation target on Tuesday.

"What will decide direction (of stocks) today is the exchange rate," said Gustavo Alcantara, a fund manager at Banco Prosper. "Furthermore, there is no longer a consensus on the maintaining the Selic rate at 25 percent."

The real weakened to 3.515 per dollar from Tuesday's close of 3.485 per dollar, almost reversing gains posted in the first two weeks of the year. The Sao Paulo Stock Exchange's Bovespa index <.BVSP> fell 1.2 percent to 11,299, close to where it began the year after a five-day losing streak.

Most of the Bovespa was in the red. However, Portugal Telecom <PTCO.IN> mobile phone company's Telesp Celular Par. <TSPP4.SA> (nyse: TCP - news - people) gained.

Last week Brasilcel, a 50-50 Brazilian mobile phone venture owned by Spain's Telefonica Moviles <TEM.MC> and Portugal Telecom, said they would buy Brazilian rival Tele Centro Oeste (TCO) <TCOC4.SA> via Telesp Cel for $1 billion.

"The first impression was that it would raise Telesp's debt to $2 billion, but now people are thinking the buy is not so bad after all and for the medium-loner term it gives them a bigger area of operation," said John Carioba, director of Indusval brokerage. Telesp stock rose 1.8 percent to 4.04 reais.

But traders said the mood was poor as the United States looked ever closer to attacking Iraq while neighboring Venezuela's social unrest continued. Both crisis have raised oil prices which risks fueling an acceleration in inflation in Brazil by elevating transport prices.

Inflation spiked to a seven-year high of 12.5 percent in 2002 as a 35 percent depreciation in the real last year lifted fuel and other prices.

On Tuesday the Central bank easing its inflation targets to 8.5 percent for 2003 and 5.5 percent for 2004.

www.mpa.gr Athens, 22 January 2003 (16:20 UTC+2)

The European Union, through a statement issued by the Greek EU Presidency, welcomes the establishment of the “Friends of Venezuela” Group made up of Brazil, Chile, Mexico, Portugal, Spain and the United States.

The EU expresses its support to the contribution the “Friends of Venezuela” Group could have to the efforts aimed at finding a viable solution to the crisis in Venezuela in accordance with resolution 833 adopted by the Organization of American States. The resolution provides for a peaceful, democratic and constitutional solution through elections.

The EU urges the institutions and the people of Venezuela to seek a solution assisted by the OAS General Secretary and the “Friends of Venezuela” Group within the framework of democratic principles and the state of law.

www.forbes.com Reuters, 01.22.03, 11:57 AM ET  By Hugh Bronstein

NEW YORK, Jan 22 (Reuters) - Investors usually frown on foreign exchange controls because they impede the free market, but Wall Street is not complaining about Venezuela's decision to temporarily close its foreign exchange market.

In Venezuela's circumstances -- with the risk of default rising as its economy contracts -- holders of Venezuela's bonds should not be shocked by the move because it will help ensure that near-term debt payments are met, analysts said Wednesday.

"This should be seen as an attempt by the government to continue to honor its obligations in the short term," said Christian Stracke, lead emerging markets analyst at CreditSights, a Wall Street research firm.

Venezuela on Wednesday said it was closing the country's foreign exchange market for five trading days to stem capital flight spurred by a crippling seven-week opposition strike against leftist President Hugo Chavez.

The bolivar currency has tumbled more than 24 percent against the dollar since the start of this year and 28.5 percent since the strike started on Dec. 2.

When countries get worried about runs on their currencies, foreign exchange controls are sometimes adopted to ration currency sales. The government usually establishes a guide as to who has a priority claim on its reserves.

"In most cases where foreign exchange controls have been put in place, foreign debt payments are at the top of the list," said Jose Cerritelli, a Bear Stearns debt strategist.

"So foreign creditors should not have a knee jerk reaction against these exchange controls because these measures are there to give them a priority claim over foreign exchange reserves," he said.

The Venezuelan Central Bank said that during the five-day closure the government would maintain the necessary operations to make public external debt payments.

"Venezuela's international reserves are there in case of emergency to finance the government's liabilities," Stracke said.

"Right now those liabilities are not just foreign debt payments but also the import of food and gasoline, due to the strike," he added. "With that in mind, the government has to make sure it is not losing its reserves to speculative capital flight."

BUYING TIME, BUT HOW MUCH? "Protecting their reserves buys them a little time, but that's all it does," said Lacey Gallagher, Credit Suisse First Boston director for Latin American economics.

"How much time it buys depends in part on the structure of the capital controls that Venezuela may put in place once the foreign exchange market reopens," she added. "Given the severe underlying problems, the risk of a credit event remains high."

Venezuelan bond spreads, which measure the perceived risk of default compared with safe-haven U.S. Treasury bonds, have ballooned more than 500 basis points to 1439 basis points since the work stoppage began Dec. 2, according to JP Morgan's Emerging Markets Bond Index Plus.

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

www.heraldtribune.com By ALEXANDRA OLSON Associated Press Writer

Venezuela's central bank suspended its foreign exchange trading for a week starting Wednesday to try to keep the country's currency, the bolivar, from further plummeting in the fallout of a 52-day-old strike that has crippled oil exports.

A new foreign exchange policy will be revealed after five business days, the Central Bank and the Finance Ministry said in a joint statement. Central Bank director Domingo Maza would not give more details.

The announcement led to speculation that the government was planning to impose exchange controls to protect its depleting foreign reserves and halt the bolivar's slide, which has lost a quarter of its value this month.

"It sounds like exchange controls are on the way," said Miguel Octavio, executive director of local investment banker BBO Financial Services.

The suspension means that Venezuelans cannot buy foreign currencies for five business days. The government said it would continue to pay its foreign debts.

Exchange controls could help strengthen the bolivar by limiting the amount of dollars that individuals and banks can buy. But they could also hurt businesses that depend on dollars to pay for imported goods. Venezuela's economy is highly dependent on imports - about 50 percent of food is imported.

Business leaders, labor unions and opposition parties launched a strike on Dec. 2 to demand that President Hugo Chavez resign or call early elections.

The strike has slashed Venezuela's oil production by two-thirds - crippling an industry that provides 70 percent of export revenue and half of government income.

The bolivar currency reached a record low of 1,853 to the dollar Tuesday. It has lost 25 percent of the its value since the beginning of the year, after losing 46 percent of its value in 2002. The depreciation has contributed to 30 percent inflation.

Traders said the Central Bank has been injecting up to $70 million a day to protect the currency. Venezuela's foreign reserves stood at $11.05 billion Monday, down from about $12.5 billion before the strike began. Venezuela also has about $2.9 billion in a rainy day fund that absorbs excess oil revenue.

Opposition and government negotiators are studying proposals made by former President Jimmy Carter to end the dispute over Chavez's rule.

The Nobel Peace Prize laureate proposed two plans Tuesday. The first entails general elections and an end to the strike. The second proposal calls for both sides to prepare for a binding referendum on Chavez's presidency in August, the midpoint of his six-year term. Venezuela's constitution allows such a vote.

The first plan would amend Venezuela's constitution to shorten presidential and legislative terms of office and stage early elections.

It calls for the opposition to end the strike and for the government, which has a congressional majority, to move quickly on changing the constitution. Amending the constitution requires the approval of congress and a popular referendum.

A so-called "Group of Friends of Venezuela," a forum of six countries - the United States, Mexico, Brazil, Chile, Spain and Portugal - has been formed to help end the standoff. Diplomats involved in the initiative will hold their first meeting at the Organization of American States in Washington on Friday.

A key point is the fate of workers at Venezuela's state owned oil monopoly. Some 30,000 of 40,000 workers are striking. Chavez has fired more than 1,000. Carter said his proposal would have strikers return to work but let the government prosecute anyone accused of sabotaging the industry.

Chavez was elected in 1998 and re-elected in 2000 on promises to help the country's poor majority, but he has failed to remedy the nation's economic ills.

Opponents blame Chavez's leftist policies for an estimated 8 percent economic contraction in 2002. Chavez blames it on opposition attempts to destabilize the country.