reuters.com Wed February 26, 2003 01:08 PM ET By Nichola Groom

NEW YORK, Feb 26 (Reuters) - U.S. manufacturers, already tripped up by a prolonged economic slump that has battered both share prices and business spending, face another hurdle on the road to restoring profit growth -- the rising cost of energy.

With crude oil prices hovering at a more than two-year high on fears about the possibility of a war in Iraq, several companies have already warned of the negative impact higher energy costs will have on their bottom lines this year and many more are expected to follow suit.

"I'm certain we'll see more (warnings), particularly in the basic materials group," said Chuck Hill, director of research at Thomson First Call, which tracks company earnings.

Makers of raw materials like steel, wood and chemicals are usually hit hardest by rising energy costs, Hill said, because they use large amounts of electricity and steam to power massive manufacturing facilities.

Analysts who cover those industries are worried earnings estimates for the first quarter will have to come down as the impact of higher energy costs takes shape.

"We are concerned that, in the near-term, (cardboard box makers) will be facing another round of downward estimate revisions," Deutsche Bank Securities forest products analyst Mark Wilde said in a report last week. "Moreover, it looks to us like the head winds from weak volumes and higher energy costs will be greater than expected (in the first quarter).

Indeed, some companies have already begun trimming forecasts in part because of rising energy costs.

Eastman Chemical Co. EMN.N , a big maker of plastic beverage bottles, as well as chemicals used to make adhesives, coatings and inks, said last month it's first-quarter profit would fall below Wall Street forecasts in part due to higher raw material costs.

On the same day, Lyondell Chemical Co. LYO.N also warned that first-quarter earnings would be impacted by the cost of reduced oil supplies from Venezuela, which is in the midst of an an 11-week oil strike.

HOLDING BACK BUSINESS SPENDING

Oil prices are trading at $37 a barrel -- just off a 29- month high -- on concerns a U.S.-led attack on Iraq, the world's eighth biggest exporter, may hit supplies from the Middle East, which accounts for about 40 percent of globally traded crude.

The strike in Venezuela and sustained cold weather in the United States has already run down U.S. stocks of crude oil to their lowest since 1975, strengthening concerns over a supply disruption.

On a broader scale, experts worry companies may be forced to scale back spending plans to make up for the rising costs, putting the brakes on the nation's already fragile economic recovery.

Business spending has not yet recovered from a collapse that led the U.S. economy into recession in 2001 and U.S. policymakers have said the prospect of war was playing a big role in holding it back.

"Make no mistake about it, persistently high oil prices will have a major impact on the global economy," said Hugh Johnson, chief investment officer at First Albany Corp. "The impact of high oil prices is very significant on both businesses' and consumers' ability and appetite to spend."

Included among the companies that have said recently they expect higher energy costs to hurt results this year are paper and building products maker Temple-Inland Inc. TIN.N , home improvement product maker Masco Corp. MAS.N and packaging company Smurfit-Stone Container Corp. SSCC.O

www.forbes.com Reuters, 02.26.03, 12:08 PM ET By Susan Schneider

NEW YORK, Feb 26 (Reuters) - Brazilian sovereign bonds jumped more than 1 percent on Wednesday, bolstering the broader emerging debt market as a rising domestic stock market and a stronger currency gave investors room to overlook chronic worries about a possible U.S.-led military strike on Iraq. Brazil's benchmark C bond <BRAZILC=RR> added 0.875 point to 73.626 bid, helping to lift the nation's share of J.P. Morgan's Emerging Markets Bond Index Plus by 1.84 percent on the day. The broader index, of which Brazil comprises a weighty one-fifth, added 0.33 percent on the day. Investors took heart from a midday climb in Brazil's Bovespa index <.BVSP> and a strengthening of the real currency against the dollar, said traders. Brazil's bonds were also helped by continued hopes the nation's new president, Luiz Inacio Lula da Silva, can push his planned reforms of the pension and tax systems through Congress, said traders. The reforms are seen as critical if Lula hopes to improve the health of Brazil's finances. "I think there's just a general feeling that the opposition is going to work more closely for tax and social security reform. That's a big factor," said an emerging debt trader. On Tuesday the leader of Brazil's largest centrist party, the Brazilian Democratic Party, promised to support Lula's reform efforts. The inclusion of the PMDB in a government coalition would give Lula's Workers Party and its allies a healthy majority in Congress. Like a host of global assets, Brazil's stocks, bonds and currency have been pinched in recent weeks by concerns that a U.S.-led invasion of Iraq would spell further trouble for an already lukewarm U.S. economy. U.S. President George W. Bush sees an attack as justified because he says Iraq is producing banned weapons. Despite Brazil's solid move higher on Wednesday, some analysts said they saw limits to its upward momentum. "We probably have the debt instruments of Brazil either at the peak or close to the peak. There is a resistance for the C bond at 75, which I don't think will be broken," said Ricardo Amorim, head of Latin American research firm IDEAglobal. MEXICO BOND DEAL IN THE PIPELINE Mexican debt, meanwhile, traded unchanged ahead of Wednesday's expected sale of a $1 billion, 12-year bond. Latin America's second-largest economy is seen selling the bond at 312.5 basis points over comparable U.S. Treasuries, according to traders and investors in London. The bond has generated a flap in emerging markets because of its inclusion of so-called collective action clauses, which are aimed at easing the painful path of restructurings. The provisos allow for changes to the bond's terms with less than 100 percent approval from bondholders, which in theory would provide some breathing room to the borrower by preventing a few holdout investors from delaying a restructuring through court proceedings. Venezuela's bonds bucked the market's broader trend with a move into negative territory as concerns lingered over the fate of the economy under President Hugo Chavez. The nation's share of the EMBI-Plus slipped 0.68 percent in terms of daily returns, with the DCB bond <VENDCB=RR> sliding 0.75 point to 69.25 bid. Venezuela's economy, which contracted last year, has been further pummeled by a two-month general strike by the opposition aimed at forcing Chavez from power. Investors are also concerned that Chavez, who has made few friends on Wall Street with his anti-free market rhetoric, has gained the upper hand in the standoff with his foes since the strike petered out. On Wednesday, Merrill Lynch cut its allocation on Venezuelan sovereign bonds to underweight from neutral in its model portfolio because of concerns there is more political and financial troubleto come as the nation's non-oil economy shrinks. (Reporting by Susan Schneider; editing by Dan Grebler; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)

money.cnn.com February 26, 2003: 4:33 PM EST

Prices rally after government report shows decline in heating fuel stocks on cold weather.

NEW YORK (Reuters) - U.S. oil prices hit their highest mark since the Gulf War on Wednesday after the U.S. government reported a big drop in winter heating fuel stocks as Washington continued to press its case for war against Iraq.

The Department of Energy said supplies of heating oil in the week to Feb. 21 fell 3.9 million barrels to 36.1 million barrels, a dangerous 33 percent deficit from a year ago as cold weather buffets the Northeast.

The news pushed U.S. light crude to a new post Gulf War high of $37.93 a barrel -- within reach the all-time high of $41.15 hit in October 1990 -- before settling at $37.70 a barrel, up $1.64 on the day.

London Brent crude gained 75 cents to $33.07 a barrel.

"For short-term trading targets there's really not much holding this market back from $40 a barrel," said Paul Horsnell, oil analyst at J.P. Morgan. "These latest inventory figures are scary. We must now be getting very close to localized physical shortages."

The U.S. inventory slump has reinforced the impact on oil prices of a bout of colder-than-normal winter weather in the world's biggest energy consuming nation.

Weather watchers are calling for continued abnormally low temperatures in the Northeastern U.S., the world's largest heating oil market, through the coming weekend, adding more pressure to thin stockpiles.

U.S. importers are also without large volumes of refined products from Venezuela where an anti-government strike has kept big refineries idled since early December.

Oil is already priced at a premium due to fears that a U.S. attack on Iraq, the world's eighth largest oil exporter, will stop Baghdad's shipments and possibly hit other supplies from the Middle East, the source of 40 percent of global crude trade.

PAVING THE WAY FOR WAR

The United States said Wednesday it doubted either Russia or China would veto a new U.N. Security Council resolution designed to pave the way for war.

The comments, made by a senior U.S. administration official speaking on condition of anonymity, seemed to improve prospects for the resolution, although questions remained over the nine council votes it needs to pass and a possible French veto.

Chief U.N. weapons inspector Hans Blix said that Iraq had not yet made a "fundamental decision to disarm," and still fell short of full cooperation with U.N. disarmament demands.

Blix, readying another report to the Security Council, told reporters he thought Iraq had stepped up its efforts to release documents and other data as required by United Nations resolutions.

But he also said, "Full cooperation or a breakthrough, no? I don't think you can say that. We have a very long list of disarmament issues and it will require a big effort in order to clarify all of those."

"I do not think I can say there is evidence of a fundamental decision (to disarm), but there is some evidence of some increased activity," he said.

U.S. oil stockpiles data released on Wednesday countered earlier comments from Washington that it was ready to release government strategic reserves quickly if it judges that a war in Iraq is causing a severe supply disruption.

U.S. Secretary of Energy Spencer Abraham said on Tuesday he would release crude from the 600-million-barrel national reserve if supplies suffer a heavy cut due to war.

But Washington has yet to make clear whether it thinks a stoppage of Iraq's 1.7 million barrels per day of exports would be sufficient to warrant a release. OPEC has said it has enough spare capacity to cover any Iraqi outage.

Oil from the emergency reserve was last released in September 2000, when thin stockpiles boosted prices to $37.80 a barrel. SPR oil was also released during the Gulf War.  

www.forbes.com Reuters, 02.26.03, 11:28 AM ET

NEW YORK, Feb 26 (Reuters) - Merrill Lynch on Wednesday cut its recommendation on Venezuelan sovereign bonds to underweight from neutral, predicting more political and financial trouble to come as the country's economy contracts. Opponents of left-leaning President Hugo Chavez recently staged a two-month national strike aimed at forcing him from office. While Chavez has survived the work stoppage, just as he did a short-lived coup in April, Merrill expects the economy of the oil-producing nation to contract by about 12 percent this year, following a 9 percent slump in 2002, . "While the government has managed to reign over PDVSA (Petroleos de Venezuela, the state oil company) and crude production will likely exceed 2 million barrels per day on average for the year, the severity of the political crisis suggests bonds should be re-priced lower as the non-oil economy succumbs to the effect of capital controls, price caps, lack of financing and deteriorated domestic demand," Merrill said in a research note. Prior to the strike, which started in December, PDVSA, the world's fifth-largest oil exporter, had produced about 3.1 million barrels per day of crude oil. 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 the president wants to establish a Cuban-style authoritarian state. As the opposition to Chavez has mounted, Venezuelan bonds have been punished with losses of 6.4 percent so far this year while the market as a whole has risen 4.568 percent in total returns measured by JP Morgan's Emerging Markets Bond Index Plus. "While our base-case scenario does not yet include an external debt default, we believe risks are increasing rapidly as the non-oil economy collapses," Merrill said. The confrontation between the government and the opposition could lead to further violence, state takeover of companies and a state of emergency under which some constitutional rights could be curtailed, Merrill noted. "We do not expect however that Venezuelan bonds would enter into a downward spiral unless the government is unable to maintain oil production above 2 million barrels per day on average for 2003," Merrill said. On Tuesday, two bombs tore into the Spanish and Colombian diplomatic missions in Caracas, wounding five people less than 48 hours after the president accused the two nations of meddling in Venezuela's political crisis.

www.delmarvanow.com By John Duffy Staff Reporter

The combination of an unusually cold winter in the Northeast as well as national and world events are conspiring to make home heating costs nearly twice as high as last year, according to the U.S. Department of Energy.

While colder temperatures usually mean higher heating bills, that is not the only reason many Delmarva region residents have seen home heating costs skyrocket. Interruption of crude oil shipments from Venezuela because of political and labor unrest and the uncertain future of war in the Middle East are also adding to oil prices. These factors contribute to the costs of home heating oil and gasoline.

According to the Department of Energy, the average price paid by consumers for No. 2 heating oil the week of Feb. 10 was $1.71 per gallon.

In Delaware, homeowners paid $1.68 per gallon. The week of Nov. 25, 2002, the price was $1.21 statewide. Inquiries the week of Feb. 21 in Sussex County found heating oil prices averaged between $1.57 and $1.79.

Much of the price depended on the size of the order. For example, orders more than 150 gallons cost less than smaller orders, and orders under 100 gallons often included a $10 shipping charge.

The rise in the cost of oil for heat, as well as electric heat, has led to an increased demand on statewide energy assistance programs.

In December 2002, U.S. Rep. Mike Castle (R) requested the release of some $200 million in a strategic reserve for federal Low Income Home Energy Assistance Program (LIHEAP).

The money is used to help low-income families with energy needs both in summer and in winter, but traditionally the funds are used more for heating than cooling assistance.

On Jan. 24, Castle secured $867,954 for Delawareans who require assistance with energy bills.

"Typically, some funding for LIHEAP is held in reserve, because you cannot really predict energy costs," Castle explained. "I think given the situation this year it was handled very well."

Castle said funding for fiscal year 2003 for LIHEAP should be around $1.8 billion nationwide, up from $1.3 billion in 2002. "That's a pretty significant increase," he said, "so I think Delaware will see a lot more of this money available for low-income families."

LIHEAP funding is distributed via local nonprofit groups in each state. In Delaware, Catholic Charities doles out LIHEAP funds. In 2002, it helped 11,796 Delaware families with between $150 and $500 in emergency assistance paid directly to utility providers. Delaware currently has 335,200 residential energy consumers.

Reach John Duffy at (302) 537-1881, ext. 106, or by e-mail at jduffy@smgpo.gannett.com.

Originally published Wednesday, February 26, 2003