asia.reuters.com Fri January 24, 2003 06:01 AM ET

NEW YORK (Reuters) - Citgo Petroleum Corp.'s president said the company would cut capital spending, delay a $250 million public offering and reduce inventories to minimum levels this year, the Wall Street Journal reported on Friday.

He said the company is taking the measures to boost cash flow that has been hurt by the seven-week work stoppage by Venezuelan oil workers, according to the article. In a letter to employees, President Oswaldo Contreras said Citgo, would shut down the Lake Charles, La., Conversion Optimization Project and a mixed distillate hydrotreater project at its Corpus Christi, Texas refinery, the report said.

He said the company would also defer several large maintenance turnarounds scheduled at its refineries and reduce product inventories to "minimum working levels," but that it feels it "can continue to keep our customers supplied with the products they need," according to the newspaper.

Contreras will also cut the number of corporate airplanes to one, the article said. Citgo owns one plane and leases one.

Credit-rating downgrades and the slowdown in crude-oil supplies from Venezuela had raised the company's cost to do business, the Journal quoted Contreras as saying, as it bought additional volumes of crude in the open market to keep its plants running, paid more for the oil and received less-favorable payment terms.

Citgo, a wholly-owned subsidiary of Petroleos de Venezuela SA (PDVSA), said in a filing with the U.S. Securities and Exchange Commission on Tuesday it expects to receive crude oil deliveries this month from PDVSA that will equal about 83 percent of the volume it received in January 2002.

Citgo was not immediately available for comment early on Friday morning.

sg.biz.yahoo.com Friday January 24, 7:00 PM Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--After a woeful 2002, the worst- performing year for equities since 1974, the question now facing investors is how to make money in 2003 given the likelihood of war.

Opinion is distinctly divided.

Some pundits see an outbreak of hostilities with Iraq as a likely catalyst to reverse the current grim mood. On the other hand, markets have never been particularly good at discounting political risk and recent heavy market declines could well get worse.

A view widely aired at the moment is that once war starts, a major uncertainty will be banished, giving the equities market an adrenaline shot.

Of course, central to this view is a fast win for U.S. and allied forces in invading Iraq to remove leader Saddam Hussein.

Historically, economic and political crises have been buying opportunities. Mike Lenhoff at Brewin Dolphin says that if, as seems to be happening, the increased likelihood of an invasion can push equities down, the prospect of a successful campaign can push them back up.

But many City of London brokers warn that any relief rally will amount to little more than a classic bear market squeeze.

Anais Faraj, strategist at Nomura, said that even though the outlook for 2003 as a whole doesn't sparkle, it is still wise to pepper a portfolio with a limited amount of risk in view of current geopolitical saber-rattling.

"Of course the best outcome for equities is no war at all, but I would anticipate a big spike up or a possible 20%-30% victory rally if there was a quick military resolution," he says.

However, Faraj cautions that there will be a huge surge in profit-taking once that 20% upside is achieved. He is advising clients to introduce some risk into their portfolios, since these stocks will likely see more upside, but to be aware that any rally isn't likely to be long-lived.

He prefers U.S. drugs group Pfizer Inc. (PFE) and European pharmaceuticals, saying that they look cheap at current levels, but would also hold defensive basic industries such as French cement maker LaFarge SA (LR) and aerospace group Thales SA (F.THL), which has a lot of government contracts.

Kevin Gardiner, strategist at CSFB, said his central case is that the war in Iraq occurs and will be quickly and successfully resolved. He estimates that the most responsive sectors to this scenario would include financials and cyclicals excluding the oil sector.

As a possible hedge, he highlights countries outside the euro zone such as Switzerland and Norway that are likely to have defensive currencies in the event of war with Iraq. Domestic plays in these currencies include Swisscom AG (SCM) and Den Norske Bank.

Oil Price Movements Key

Andrew Archer, oil analyst at Banc of America, believes oil price movements are key. He thinks that the war premium, which has driven the sector to record highs over the past two months, will unwind relatively quickly in the event of a war.

European benchmark Brent crude is trading above $30 a barrel after touching two-year highs in recent weeks. It spiked at $40 per barrel during the "Desert Storm" operation to liberate Kuwait during the last Gulf War in 1991.

"Governments have been building up strategic reserves in anticipation of a conflict in the Middle East," Archer said. "The release of U.S. strategic reserves on the first day of Desert Storm saw the oil price fall $10 a barrel. Hence as CNN showed pictures of burning oil fields, oil prices were falling."

U.S. strategic reserves amount to almost 600 million barrels. At the same time, any resolution to the general strike in Venezuela should drive down oil prices.

Investors may also have to grapple with the prospect of war being postponed or the Arab response if there is no United Nations mandate for a U.S.-led invasion. In this case, analysts say cyclicals would continue to underperform defensives.

Continuing strength in oil prices would then be a concern. Those sectors with the highest exposure to energy as a percentage of costs include chemicals at 60%, building materials at 20%-25%, metals and mining at 20% and cement at 25%.

Airlines would also be at risk - globally, 12%-14% of costs to the industry are fuel-related. Goldman Sachs recently cut estimates for five European flag carriers saying that, even before any war risk, 2003 is likely to see sharp capacity and cost growth against a background of stagnant demand.

Protracted War Still Possible

"What isn't priced into the market is a protracted war that disrupts oil supplies, which will have a detrimental impact on the G7 economies," said Philip Shaw, an economist at Investec Securities.

"The terrorist threat is also impossible to quantify," he added.

Khuram Chaudry at Merrill Lynch said the parallels currently being drawn in the market with 1991 are overdone. "The repercussion of a war will be far greater than the market currently anticipates and I would advise investors to remain overweight defensive assets such as bonds, utilities and oil," he said.

He favors European telecoms, which he says should continue to benefit from restructuring.

"Some perceived defensives may have a very cyclical spread around the globe. Hence investors should look to utilities that haven't grown outside their own market but should avoid pharmaceuticals," Chaudry added.

But even if there is a swift resolution to geopolitical tension, a regime change in Iraq isn't going to prove the miracle cure for European economies.

Although 2003 started off well, with the U.S. December Institute of Supply Management Survey hinting that manufacturing activity could be edging toward recovery, macroeconomic data since then have failed to live up to expectations. Overall, the global economic complexion depicted is one where growth remains subdued.

The outlook for earnings also raises questions as to whether the market can break out of its negative three-year trend. Technology giants Microsoft Corp. (MSFT), Intel Corp. (INTC) and International Business Machines Corp. (IBM) all rattled Wall Street with their lackluster forecasts.

Analysts at Dresdner Kleinwort Wasserstein say Federal Reserve Chairman Alan Greenspan's "economic soft-spot" thesis is too cuddly a description of the current economic picture. "Economic wasteland," would be more apt, they suggest.

They remain underweight equities and believe the outlook for the rest of the year is turbulent, whatever happens in Iraq.

-By Maria Daly, Dow Jones Newswires; +44-20-7842-9308; maria.daly@dowjones.com

abcnews.go.com

— LONDON (Reuters) - Oil prices posted slight gains on Friday after two days of sharp declines following evidence that strike-bound Venezuelan production is beginning to recover.

U.S. light crude added seven cents to $32.32 a barrel and London Brent gained four cents to $29.76. U.S. crude hit a two-year high of $35.20 earlier this week.

President Hugo Chavez raised the stakes in Venezuela's bitter oil industry conflict on Thursday by announcing 3,000 oil company executives were sacked and saying oil output was rising faster than expected.

Chavez is using troops and replacement crews to break a seven-week-old strike aimed at driving him from office. He still faces huge problems restarting refineries and persuading foreign shippers to resume exports.

Anti-government oil workers concede crude output has risen to 812,000 barrels per day (bpd), 25 percent of pre-strike capacity, but say 85 percent of its workforce remain out.

Opposition data lags government estimates, which peg production above one million bpd, but both figures show a steady recovery over the past fortnight.

Oil markets are not betting on any swift increase in Venezuelan output.

"For the oil markets, a definitive end of the strike does not translate into an immediate return to pre-strike output levels," said Michael Rothman of Merrill Lynch.

"Reliable indications suggest it may take 30-45 days to get production back to the 1.5 million barrel a day mark with 45-60 days to necessary to elevate production by an additional million." Pre-strike output was 3.2 million bpd.

OPEC Secretary-General Alvaro Silva said OPEC is already doing all it can to bring world oil prices down and sees no lack of crude on world markets.

"What can we do more? I do not agree there is a lack of oil," Silva told reporters in Davos on the sidelines of the annual World Economic Forum. "The problem of the price is the threat of war (on Iraq)."

He said OPEC producers were "doing our best" to bring crude below $28 a barrel, the top end of the group's targeted price range.

Supply concerns in the United States eased when government figures released on Thursday showed crude oil inventories up 1.5 million barrels to 273.8 million during the week to Friday.

The increase defied predictions that inventories would fall below 270 million barrels for the first time since 1975. Higher shipments from Saudi Arabia have flowed in to blunt the impact of the Venezuelan disruption.

Fresh signs that the United States is willing to face down international opposition to an attack on Iraq made little impact on the oil market.

On Thursday, Washington shrugged off vocal opposition to what some allies see as a rush to war as China and Russia joined France, Germany and Canada in urging the United States to give U.N. weapons inspectors more time in Iraq.

Secretary of State Colin Powell said Washington would find other supporters if it decided to launch military action.

"I don't think we'll have to worry about going it alone," Powell said in Washington after talks with Britain's supportive Foreign Secretary Jack Straw. He said Washington had made no decision on whether to seek an additional U.N. resolution to authorize use of force to disarm Baghdad.

Dealers said a war on Iraq was now priced into the oil market and cited predictions that any stoppage in Iraqi production could prove short-lived.

The Pentagon said it would make no sense for U.S. forces to hit oil facilities and oil companies said they were expecting only a brief stoppage in Iraq's two million barrels daily of exports.

"We are banking on a two- to four-week loss of Iraqi oil and we've covered ourselves," said a senior executive at a major oil company in comments typical of the industry viewamong companies contacted by Reuters.

abcnews.go.com — By Knut Engelmann

DAVOS (Reuters) - OPEC on Friday said it could do no more to rein in runaway world oil prices, blunting hopes the cartel might be prepared to pump more crude if the United States launches war on Iraq.

Organization of the Petroleum Exporting Countries Secretary-General Alvaro Silva said the group already was pumping enough but could not counter the impact of the threat of war on oil prices.

"What can we do more? I do not agree there is a lack of oil," Silva told reporters in Davos on the sidelines of the annual World Economic Forum.

"The problem of the price is the threat of war."

War fever and a seven-week-old general strike that has cut exports from OPEC nation Venezuela sent U.S. oil prices to a two-year peak of $35.20 a barrel this week. U.S. crude traded at $32.32 on Friday.

OPEC aims to keep prices for a basket of its crude in a $22-$28 range and has just raised production quotas by 1.5 million barrels a day, seven percent, effective February 1.

"The price is over $28 and we are making every effort to put the price back in the band," said Silva. "We are doing our best to get it there."

OPEC's problem is that most of its member countries already are pumping at full capacity.

Only Saudi Arabia and the United Arab Emirates are believed able to open the taps any further.

Saudi Ambassador to the United States Prince Bandar bin Sultan said this week that Riyadh was willing to raise production unilaterally if oil prices do not ease soon.

Saudi Arabia's new OPEC quota from February was set at 7.963 million bpd, but the kingdom is expected to be pumping between 8.5-9.0 million bpd in the next few weeks, industry sources said earlier this week.

Saudi Oil Minister Ali al-Naimi has made clear that Riyadh is capable if necessary of ramping up flows to 10 million bpd within weeks.

If OPEC cannot cope and war on Iraq cuts Baghdad's exports while Venezuelan supplies remain slow, consumer countries may need to release emergency strategic reserves for the first time since the 1990-1991 Gulf War.

The International Energy Agency in Paris has said it is prepared to consider ordering a release from the huge stocks held by its 26 industrialized member countries.

frontpagemag.com By Michael Radu FrontPageMagazine.com | January 23, 2003

Hugo Chávez Frías’s presidency in Venezuela has caused an opposition coalition to form that, uniquely in Venezuela’s history, breaks all class distinctions: middle-class professionals and mid-level military and police officers; unionized workers and business associations; the Catholic Church and virtually all the normally competitive media, have come together.

This poses a major problem for the United States. Chávez is elected freely, and democracy—or at least free elections—has been a sacred cow of U.S. foreign policy in Latin America for decades. But most of Chávez’ policies are distinctly anti-democratic, often unconstitutional and usually anti-American and pro-Castro. Furthermore, Venezuela is a major supplier of oil and oil byproducts to the United States, and the civil conflict there has reduced those supplies from 3 million barrels per day (bpd) to less than 200,000.

Chavez was first elected in 1998 and again in 2000. Since then, a number of populist/leftist South American presidents have been elected, including most recently Luiz Inácio Lula da Silva in Brazil (inaugurated 1/01/03) and Lucio Gutiérrez (inaugurated 1/15/03) in Ecuador. All have contempt for free markets, are distinctly anti-American and pro-Castro, albeit they operate under different constraints and in distinct national political and economic environments.

To begin with, Chávez’s own democratic credentials are dubious. He first gained notoriety in 1992 when, as a paratroop lieutenant colonel , he staged a failed coup against the democratically-elected president Carlos Andrés Perez. Arrested and jailed, he was released by Perez’ successor. Taking advantage of the profound popular discontent with the Venezuela’s decaying two-party system, Chávez ran in 1998 on an anti-corruption, nationalist and populist program, strongly supported at the time by all the numerous and disparate leftist groups and mini-parties. He blamed the country’s structural problems on one cause—elite corruption, avoiding the more profound national corruption, decades of which had accustomed the entire population to little work and unsustainable social services, all excused by the myth of infinite oil revenues.

Ideologically, Chávez is a wooly rethread of the quasi-Marxist, demagogic populists who have ruined Latin America during the 1970s and 1980s. His declared hero is Simón Bolívar, the father of South American independence two centuries ago, and indeed Chávez has changed the country’s name to the Bolivarian Republic of Venezuela. His "Bolivarian" ideology includes nationalism, "solidarity" and, last but not least, anti-Americanism.

His first visits abroad were to Baghdad, Tripoli, and Teheran. His friendship with Castro is both personal and concrete: in accordance with a 2000 agreement, Venezuela provides 50 percent of Cuba’s oil imports, some 53,000 bpd, with 25 percent of the cost payable over 15 years and a two-year grace period—all of which amounts to a vital lifeline to Cuba’s dismal economy. Castro has paid a long visit to Venezuela (reminiscent of his three-week visit to Allende’s Chile) and provides doctors (which Venezuela does not need) and experts on internal security (which the Chávez regime does need), including some involved in the formation of the "Bolivarian circles," a local copy of Cuba’s infamous Committees for the Defense of the Revolution. Like the CDRs, the Bolivarian circles are basically mobs of the unemployed, unemployable and social misfits paid and armed by the government.

To make his ideological allegiances and the threat he poses to regional stability clearer, Chávez’ security services are actively cooperating with the Colombian Marxist-Leninist terrorists/narcotrafficantes of the Fuerzas Armadas Revolucionarias de Colombia – Ejército Popular (FARC-EP), including providing arms, safe havens and transit facilities—at least according to the Colombian government and high-ranking defectors from the Venezuelan military.

All of this raises a crucial issue regarding the Chávez regime’s chances of surviving: the loyalty of the armed forces. Indeed, with his popularity in the 20-percent range among all social and economic sectors of the population, including the poor and disadvantaged he is supposedly championing, it is becoming clearer by the day that Chávez’ ability to stay in office, just as Allende’s before him, is almost completely dependent on the military.

The problem is that the Venezuelan military has a dislike of Castro and Castroism that goes back to the early 1960s, when Fidel and his sidekick Che Guevara prepared and led a failed insurgency against the recently established democratic government in Caracas. And although in April 2002 segments of the military briefly removed Chávez from power, only to have others bring him back, the country’s almost total militarization in recent months—the armed forces have taken over the oil fields, ports, and police armories in Caracas, the transportation and distribution sectors, etc.—increases the stress on an institution that has had no decisive political role since the 1950s. Chávez’ habit of appearing in public ceremonies with the generals in his lieutenant colonel uniform, rather than as the civilian supreme commander he is supposed to be by the Constitution, does not help with the military’s institutional pride—or speak well for his political judgment.

Since December 2, 2002, the usually disorganized and divided opposition has engaged in a general strike which, so far, resulted in the collapse of the oil industry, currency and financial system, causing some $3 billion in economic loses so far. Chávez’ answer has been to fire the entire management and thousands of workers of the national oil company (PDVSA, which provides half the government’s budget), and to try to split the company in two. He knows he has a problem (no alternative workers, managers or administrators), so he is now asking Lula to provide them. This is a very unrealistic idea is based on fluffy sentiments of solidarity rather than serious considerations, since Brazilian union workers are refusing to do this and in all events Lula has no surplus of workers. And this is one area where Castro cannot help.

In the short term, Chávez just may survive the "fascist" and "terrorist" challenge of the general strike (never mind that the "fascists" are a majority of the people, from taxi drivers to bankers and bishops to union leaders, and the "terrorists" are all those who do not like him), albeit at an enormous cost to his country. His Bolivarian and Popular Organizations have written him demanding the nationalization of all media (or at least the anti-Chávez outlets) and the financial sector and that oppositionists be tried for "sabotage." Does all this sound like Stalin or Castro? Yes, because the ideology behind such claims is the same.

Meanwhile, Washington is at a loss how to deal with the situation. Not surprisingly, a group of 18 leftist Democrats in the U.S. House—John Conyers (D-MI), Jesse Jackson Jr. (D-IL), etc. —joined by that body’s sole Socialist (Bernie Sanders, I-VT) took sides (for Chávez, naturally) and decided that "it is against the best interests of Venezuela and its people" to accept the opposition’s (66%) demands for new elections.

A "friends of Venezuela" group of governments is suggested as a mediator, but since Chávez has managed to transform Venezuela’s consensus-based politics into a zero-sum game, that idea seems to be a loser, as demonstrated by the failed attempts by the Organization of American States’ president to mediate between Chávez and his opponents. Ultimately—back to Allende—the civil strife in Caracas will be resolved by the least democratic but still most effective institution: the military. The tragedy is that the longer Chávez stays, the more devastating the economic impact on the country and, equally important, the bloodier the outcome.

Michael Radu is the Director of the Center on Terrorism and Counter-terrorism of the Foreign Policy Research Institute in Philadelphia, and a contributing Editor of FPRI's ORBIS journal.