www.middle-east-online.com First Published 2003-01-27, Last Updated 2003-01-27 13:18:43

Traders worry about high probability Washington might go it alone in Iraq despite split with key UN members.

LONDON - Oil prices bubbled up Monday as concerns about possible disruption to Middle East supplies mounted ahead of a key report by UN weapons inspectors on Iraq, which traders feared could trigger a US-led Gulf war.

The price of benchmark Brent North Sea crude oil for March delivery rose to 30.60 dollars per barrel in early trading from 30.49 dollars at the close of trading on Friday, when prices had climbed by 77 cents.

In New York, light sweet crude March-dated futures rallied by 1.03 dollars per barrel on Friday to 33.28 dollars.

Prices climbed again as UN arms inspectors prepared to deliver a report to the UN Security Council later Monday on their two months of work hunting down alleged weapons of mass destruction in Iraq.

Amid signs of a split between the United States and other members of the UN Security Council such as France and Russia, traders were worried that the US administration might wage a solo war on Iraq.

"Although everybody is waiting for the weapons inspectors to make their report... the contents seem widely anticipated," said Prudential Bache trader Christopher Bellew.

"It seems likely that the UN is going to give the arms inspectors more time. There is still a very high probability that there could be military intervention by the Americans, and that keeps prices higher at the moment," he added.

Analysts say that the oil market is already suffering a shortage of oil, largely because of a strike in Venezuela that has sent the country's oil output down to a fraction of its usual levels of about three million barrels per day.

Despite recent signs that the stoppages are easing somewhat, the disruption has drained US commercial stocks of crude oil down to uncomfortably low levels for the world's biggest oil consumer.

Against that backdrop, prices have remained high despite the promise of an output increase by the Organisation of Petroleum Exporting Countries (OPEC) of 1.5 million barrels per day, which officially starts next month but has already started flowing, according to experts.

If the market loses Iraq's oil output of about two million barrels per day while Venezuela's exports are crimped, OPEC might not be able to keep a lid on prices, analysts say.

"With US crude stock levels at 27-year lows and OPEC spare capacity looking extremely thin, armed conflict in the Gulf is approaching at a time when the market could hardly be more sensitive to supply disruptions," said Barclays Capital head of research Kevin Norrish.

But he said that any oil price spike was likely to be short-lived and restricted to the period just before war.

"The release of US strategic reserves should limit its extent, while a seasonal slowing of demand combined with strong non-OPEC supply growth will then provide the conditions for substantially lower prices in the second quarter," he wrote in a note to clients.

Venezuela's crude output is now close to a million barrels per day, striking managers of the Petroleos de Venezuela state oil firm said Saturday.

The government has put the figure at more than one million barrels, saying most of the production was being exported.

www.forbes.com Reuters, 01.27.03, 8:22 AM ET

CARACAS, Venezuela, (Reuters) - Striking Venezuelan oil workers said crude output fell slightly Monday, stalling after a three-week recovery that took flows to almost a million barrels per day, or 30 percent of pre-strike levels.

Crude output fell 20,000 bpd to 966,000 bpd, 29 percent of pre-strike levels, according to a daily oil industry report by anti-government strikers.

The government, which has used troops and replacement crews to break the eight-week-old strike, has consistently held higher estimates for crude output, pegging it at 1.32 million bpd on Sunday.

"Most of the output is in the east of the country, in northern Monagas, where reservoirs are youngest and where extraction is relatively easy and requires little technical work," said the report by strikers, many of whom occupied senior positions in state oil company Petroleos de Venezuela.

"This area has natural flow due to the well conditions... a situation which is totally different in the west, where wells require large amounts of work," it added.

The report said strike breakers were putting extra oil into existing contracts, but that its sales and marketing operation was still destroyed by the strike.

"This makes us think that the crude could be being stored," the report said.

The government has said that 75 percent of blue-collar workers have already returned to work.

Exports rose sharply last week from very low levels to near 700,000 bpd, according to ship agents and port authorities, but they were still at just 25 percent of pre-strike levels.

The anti-government strikers, who are seeking to force President Hugo Chavez to resign and call early elections, said 80 percent of oil workers were observing the strike in the east.

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 3:43 PM ET Jan. 27, 2003

NEW YORK (CBS.MW) -- Crude futures slipped back under $33 a barrel and gold prices closed off their high of $373 an ounce Monday after a much-anticipated report by the U.N.'s chief arms inspector on Iraqi weapons failed to shed light on the next U.S. move.

"The concern that the U.S. will invade Iraq is now becoming less clear as Hans Blix did not produce the "decisive" evidence that the world wanted to see of Iraq's weapons of mass destruction," said John Person, head financial analyst at Infinity Brokerage Services.

On the New York Mercantile Exchange, the March crude futures contract closed at $32.29 a barrel, down 99 cents. The contract fell to a low at $32.20.

February gold ended the session at $369.40, up $1 an ounce on Nymex, after trading earlier at $373. See Metals Stocks.

Iraq hasn't yet accepted a U.N. demand that it forsake weapons of mass destruction, but is cooperating "on the whole" with weapons inspectors, Blix told the Security Council Monday.

Blix said more work is needed to verify Iraqi compliance. He pointed out that many questions remain, including those regarding Iraq's development of missiles, and chemical and biological weapons. See full story.

Crude futures gained more than $1 Friday ahead of the U.N. Security Council meeting, but BridgetonGlobal.com head analyst Jeff Mokychic noted that "once the report came without any surprises, traders were able to scale back on their position."

Overall, Blix's testimony was "mixed at best," said Charles Nedoss, a gold analyst at Peak Trading Group. "There was no smoking gun, but there was compelling evidence that Iraq hasn't been fully forthright and has breached the U.N. agreement."

Todd Hultman, president of Dailyfutures.com said the U.S. and U.K. would likely "seize upon" Blix's comments that Iraq hasn't accepted the disarmament process to "strike Iraq."

"Other members of the Security Council are not swayed, but as [U.S.] Secretary General [Colin] Powell said this weekend, the U.S. is prepared to attack without the consent of the other members," Hultman said.

Also Monday, John Negroponte, U.S. ambassador to the U.N., called Iraq's 12,000-page report, which was submitted in December, "inaccurate." Negroponte said Iraq is "not cooperating unconditionally."

Jeremy Greenstock, British Ambassador to the U.N., said the situation wouldn't be resolved peacefully under the U.N. resolution unless the U.N. gets 100 percent cooperation from Iraq. The U.S.'s Powell echoed Greenstock's comments Monday afternoon.

President George Bush "takes his case to the American people" Tuesday in his State of the Union Address, and "military action is likely to commence sometime in February," said Hultman.

Despite the latest decline in oil futures, prices "will continue to trade on the defensive as immediate supplies will be hard pressed to replenish from Middle East outflows and more importantly the 'cat and mouse' game with Iraq will continue," said Person.

The outcome of the situation in Iraq remains uncertain, and world oil supplies are still "vulnerable," Person said.

Venezuela still in backseat

In other news Monday, Venezuela's oil strike entered its ninth week with OPEC Secretary General Alvaro Silva indicating the cartel is doing all it can to make up for the oil supplies lost in the strike.

"For the oil markets, a definitive end of the strike does not mean an immediate return to pre-strike output levels," analysts at Fimat USA told clients Monday. "It may take 30 to 45 days to get back to the 1.5 million barrel per day mark, with 45 to 60 days necessary to elevate production by an additional 1 million barrels per day."

The latest report on U.S. supplies failed to reveal much of an effect from the loss of production, however.

Early Thursday, the American Petroleum Institute reported that crude stocks rose by 181,000 barrels to total 272.4 million barrels in the week ended Jan. 17, up from 272.2 million a week earlier.

Last week, the Energy Department reported that inventories of crude climbed 1.5 million barrels to 273.8 million barrels as of the week ended Jan. 17, up from 272.3 million a week earlier. See full story. An update on supplies is due Wednesday morning.

Petroleum-product prices closed lower to follow crude. February unleaded gasoline fell by 2.1 cents to 90.15 cents a gallon. February heating oil closed at 93.43 cents a gallon, down 1.59 cents.

Natural-gas futures closed down 12.8 cents at $5.396 per million British thermal units with the latest six- to 10-day forecasts calling for above-normal temperatures in the Northeast through New Mexico and on the West Coast, according to Fimat.

Over in the equities arena Monday, the losses in crude pressured most oil service stocks, and took the Oil Service Index ($OSX: news, chart, profile) down 4.9 percent. See Energy Stocks.

Sugar, cocoa futures sweeten

Sugar futures jumped more than 5 percent, as high crude-oil prices are expected to increase the demand for ethanol production, said Dailyfutures.com's Hultman.

"With the March sugar contract trading over a cent above the July contract, it is fair to say that the markets are viewing this tightness in supply as a temporary problem," he added.

March sugar added 0.41 cent to stand at 8.38 cents a pound after touching a high at 8.53 cents.

Cocoa futures also moved higher on continued unrest in Africa's Ivory Coast, a major cocoa-producing region. March cocoa added $63 to $2,250 per metric ton.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at 243.3, down 0.4 percent amid losses in crude futures.

Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

www.whnt19.com

Caracas, Venezuela-AP -- Venezuelan President Hugo Chavez (OO'-goh CHAH'-vez) is promising price controls and other measures.

He's trying to hold off an economic tailspin caused by an opposition strike now in its ninth week.

He's already imposed limits on trade in foreign currencies.

Hundreds of thousands of his foes occupied a central Caracas highway for the entire weekend to protest a Supreme Court decision suspending a referendum next month on Chavez's rule.

Opposition leaders say instead of the referendum, they will collect signatures next month petitioning for Chavez to quit.

The strike called by a coalition of business, labor and political groups has crippled oil production in the world's fifth-largest petroleum exporter.

Although the referendum wouldn't have been binding, opponents had hoped a negative outcome would have embarrassed Chavez into quitting.

www.forbes.com Reuters, 01.27.03, 7:20 AM ET (Fixes typographical error in author credit line at end of story)

PORTO ALEGRE, Brazil, Jan 26 (Reuters) - Venezuelan President Hugo Chavez on Sunday said his government would present a bill in two weeks to tax financial market transactions, raising more uncertainties for investors as the country suffers under an 8-week-long strike.

Only last Wednesday, Venezuela, the world's fifth-biggest oil exporter, closed its currency market for five trading days after vital oil output was hit by the work stoppages that aim to force Chavez to resign and make way for elections.

"We are in favor of this proposal and it is very probable that a law in Venezuela establishes a tax on financial transactions in the short term," Chavez told reporters. "The government will present parliament with a law (bill) to discuss in two weeks time."

Later, he suggested other measures might follow.

"We have decided to put in place currency controls to protect the international reserves... so as not to threaten the population, there must also be price controls," Chavez said.

Hundreds of rowdy flag-waving supporters cheered Chavez's at a demonstration of support at the six-day World Social Forum being held in Brazil's southern city of Porto Alegre. The WSF is a meeting of leftist intellectuals and social groups designed to counter the conference of national and business leaders at the World Economic Forum in Switzerland.

The bill to tax financial transactions was apparently inspired by the so-called Tobin Tax on foreign exchange transactions, named after Nobel Prize-winning U.S. economist James Tobin who first floated the idea in the 1970s.

"We are currently protecting our international reserves from speculative attacks," Chavez told reporters earlier. "We are studying a tax like the Tobin one for financial transactions."

The Tobin Tax has been championed by some social groups as a way of reducing damaging currency speculation and raising funds for developing countries, but it has been largely rejected by finance ministers and central bankers in Europe.