War with Iraq may have little impact on oil prices

Thursday, March 20, 2003 By MICHAEL LEMANSKI Norwich Bulletin; mlemanski@norwichbulletin.com

Given the way a Middle Eastern leader's mild case of indigestion seemingly causes pump prices to fluctuate, it's reasonable to expect oil prices to rise when bombs fall on Iraq. Not so, according to the American Automobile Association.

"They don't expect anything to happen in terms of prices," said Fran Mayko, spokeswoman of AAA's Hamden office. "There are projections of higher prices, but it's hard to project at this point.

"There is absolutely no reason to rush to the gas pumps when war is declared."

Locally, gas prices are higher than a month ago -- and way higher than a year ago.

But, according to experts, it's due to a variety of factors ranging from war jitters, labor strife in oil export giant Venezuela (now settled), and a very cold winter.

Throw in the fact the U.S. gets most of its imported oil from Saudi Arabia, Mexico, Canada, Venezuela and Nigeria, Mayko said logic dictates an Iraq war will not harm U.S. supplies.

Proving that point Wednesday was the crude oil markets on the New York Mercantile Exchange. For the first time in months, crude oil was below $30 per barrel at $29.88, down from a high of $40 this year.

Still, Mayko points out, if people think gas is an issue and rush out to buy it after the "special reports" start appearing on TV, gas problems could be a self-fulfilling prophecy.

"That, right now, is the biggest worry," Mayko said, adding war jitters sometimes are worse that the war itself. "I think so. I think speculation has a lot to do about gas prices."

In short, Mayko said, motorists shouldn't panic when the bombs drop and fill up. If they do, supplies will be temporarily low, a condition that has already happened in southern California, she said.

"If people start to panic, it's only going to create problems and needless fuel shortages," Mayko said.

Local concerns

For example, in eastern Connecticut Tuesday, there were no signs of panic, but motorists were wandering the highways looking for the best gas deals, which are - on average -- up a nickel from a month ago and up 49 cents from a year ago.

Generally, the best prices -- under $1.70 -- can be found in Willimantic, Jewett City, and a couple of Brooklyn gas stations (along Route 6). Although some scattered, less than $1.70 stations, may be around.

The lowest price, apparently, was the Willimantic Xtra Mart on Main Street, which was $1.65 per gallon Tuesday.

For Brooklyn resident Tony Cataldo -- a physical therapist whose house calls put him on the road often -- high gas prices mean a drop in income.

"Theoretically, it cuts into what I make," Cataldo said Tuesday, filling up on $1.73 per gallon gas at the Brooklyn Xtra Mart on Route 6.

Norwich attorney John M. Newson said his 1993 Corvette requires ultra unleaded, which costs $1.97 per gallon at the Norwich Sunoco station on West Town Street, where he was filling up Tuesday.

He said the high fuel costs are making it more expensive to drive.

"It's high, but I remember a couple of summers ago. It was a little over $2 a gallon," Newson said, adding high prices are a tiny sacrifice for people to make. "If that's what is going to happen, then, I guess, we're going to have to deal with it. When you buy a car like this, it's going to cost you more money."

As for the consequences, Norwich gas station attendant Patel Anup -- whose family owns the West Town Street Sunoco -- said the war could hurt his family, especially if travel habits dwindle.

"Every week it's going up by 3 cents," Anup said. "You're losing because if people don't drive, it's not a good thing."

www.boston.com By Fabiola Sanchez, Associated Press, 3/20/2003

CARACAS - Hundreds of opponents of President Hugo Chavez rallied yesterday to show support for a strike leader who dodged charges of treason and rebellion by winning asylum in Costa Rica.

Supporters of Carlos Ortega cheered and waved Venezuelan and Costa Rican flags in front of the Costa Rican Embassy in Caracas.

The labor leader slipped into the embassy Friday after hiding from authorities for two weeks. He is waiting for the government to give him safe conduct to Costa Rica, which said it granted him asylum for humanitarian reasons.

''I'm here to show him my solidarity,'' 78-year-old Maria Diaz said at the rally. ''He fought against a dictatorship, and I am thanking him for that.''

Ortega led a two-month strike intended to force Chavez's resignation or early elections. The strike fizzled last month without achieving its goal, but crippled the world's number-five oil exporter and cost Venezuela $6 billion.

Venezuela was one of the largest US suppliers before the strike.

Opponents accuse Chavez of trampling on democratic institutions and alienating investment by his leftist policies.

The president says his foes want to oust a democratically elected leader and restore power to two corrupt political parties that ruled Venezuela for four decades.

Foes are pushing to hold a referendum that would end Chavez's rule next year. But the fractious opposition is struggling to recover from the failure of the strike.

The showing of hundreds of people at yesterday's protest was disappointing for a movement that drew up to 1 million people to marches last year.

Strike leaders urged Chavez's opponents not to give up, saying that the president was moving to crack down on adversaries.

''The word is street, street, street, and more street. Not one step back!'' said Horacio Medina, an executive fired from the state oil monopoly, Petroleos de Venezuela SA, for leading the walkout.

Medina and six other former executives emerged from hiding Tuesday after a judge threw out warrants for their arrest on charges of interrupting and damaging the country's fuel supply. Prosecutors have said they will appeal that ruling.

Carlos Fernandez, president of Venezuela's largest business association and another strike leader, is under house arrest pending trial for rebellion and instigation.

With Ortega gone, the opposition would lose one of Chavez's boldest foes and one of the few survivors of the political order the president has striven to dismantle.

Ortega, 56, dealt one of the first blows to Chavez by winning the presidency of Venezuela's largest labor union two years ago, frustrating Chavez's attempt to seize control of one of the opposition's only strongholds.

Oil production is recovering. The government says output is 3 million barrels a day, almost what it was before the strike, while fired executives put the figure at 2.4 million barrels.

But problems persist. The government said it would try today to restart the main gasoline-producing unit at the El Palito refinery, which has been down for a week because of a mechanical failure.

Delays in restarting it could force Venezuela to continue importing gasoline to prevent shortages.

This story ran on page A10 of the Boston Globe on 3/20/2003. © Copyright 2003 Globe Newspaper Company.

biz.yahoo.com Thursday March 20, 4:50 pm ET

NEW YORK (Reuters) - World oil prices extended a week-long slump to set new three-month lows on Thursday as the United States launched a widening offensive on Iraq and dealers predicted an easy victory for Washington. Prices swung wildly during the day on reports, denied by Baghdad, that three or four oil wells were on fire in the south of the country.

OPEC (News - Websites)exporters have said they could fill any supply gap resulting from the conflict in the oil-rich Gulf, and that markets were already well supplied. The West's energy watchdog, the International Energy Agency (IEA), said it saw no reason to release emergency stocks.

U.S. crude futures for May (CLK3) delivery fell $1.24 to $28.12, touching its lowest price since mid-December. Benchmark Brent crude oil fell $1.25 to $25.50 per barrel in London, after having touched a three-month low of $25.30.

Oil has shed a quarter of its value in the last week on a massive bet by investment funds that the war will end quickly, without causing major damage to oil installations or supply disruptions.

"The war premium is diminishing on a growing certainty that coalition forces will prevail," said Peter Gignoux, head of the London energy desk at Salomon Smith Barney.

Hours after U.S. cruise missiles hit targets in Baghdad, officials in neighboring Kuwait said oil output was normal, despite two Iraqi missiles hitting the north of the country.

Oil tanker traffic from the Gulf, which provides 40 percent of world oil exports, was also running smoothly, shippers said.

Market assumptions of limited damage to oil installations were challenged by earlier reports that three or four oil wells were on fire in southern Iraq, where half the country's oil is produced.

Defense Secretary Donald Rumsfeld said he had indications Iraq may have set fire to several wells, but Reuters eyewitnesses said there were no signs of fire at Iraqi oilfields close to the border with Kuwait.

Iraq has around 1,100 wells in total, analysts said.

Iraq suspended oil exports from its southern fields earlier this week, when United Nations inspectors left the country. Limited exports continued on Thursday from a pipeline to the Turkish Mediterranean.

OPEC TO FILL SHORTFALL

The Organization of the Petroleum Exporting Countries has reassured consumers that it was ready to tap its spare capacity to make up for any shortage from Iraq, but said markets were already well supplied.

"We are not thinking of any increase in production," said OPEC President Abdullah al-Attiyah. "Oil prices are heading downwards. This shows there is more oil in the market than the market can absorb."

Saudi Arabia, the world's biggest exporter, said its oilfields and export terminals were running normally and it was ready to pump more oil to stabilize markets.

Riyadh has already ramped up production well beyond nine million barrels daily, above an OPEC quota of eight million.

The IEA said there was no need for industrialized nations of the West to release emergency stocks as it was confident OPEC could cover the shortfall.

"At the precise hour we speak, I think it is not necessary (to release stocks)," IEA executive director Claude Mandil told Reuters. "We had a very strong statement from OPEC, which has said they will ensure any shortfall and we are confident they will do their best."

The IEA, which oversees some four billion barrels of stocks in 26 industrialized countries, said a release would become necessary only in case of a shortage that could not be covered by OPEC.

It also ruled out any unilateral reserves release by any one member, saying key importers the United States, Japan and South Korea all shared its view that a stock draw was not necessary.

This is a transcript from The World Today. The program is broadcast around Australia at 12:10pm on ABC Local Radio.

The World Today - Thursday, 20 March , 2003 12:50:23 Reporter: Stephen Long

JOHN HIGHFIELD: And for the broader Australian economy, and particularly motorists, some good news in these dark times we're experiencing.

The huge premium which has been built into oil prices over recent weeks has been one of the first casualties from this suggestion of war. But West Texas Intermediate Crude has lost more than a dollar a barrel in its value overnight, the fifth straight day of falls in the oil price.

Spot prices well below US$30 a barrel have been seen in recent trading in the last few hours. That's down by more than 25 per cent on the 12-year high of nearly US$40 just a few weeks ago. Commodities analysts are saying it could well fall further in the short term.

But leading economists also remain concerned about longer-term threats including the sparse stocks of oil reserves in the United States and the threat that Saddam will actually set his oil fields ablaze.

Finance Correspondent Stephen Long reports.

STEPHEN LONG: It was a cent shy of US$40 a barrel late last month, but West Texas Crude has tanked on the eve of war. The price per barrel has fallen by 20 per cent in the past week alone.

And if the pattern of the last Gulf War is repeated, it will fall sharply again when the bombs start tumbling. David Thurtell, commodity strategist at the Commonwealth Bank, says that prospect has speculators scrambling to protect their positions.

DAVID THURTELL: In the last Gulf War the release of reserves on the day the hostilities started pushed oil down by $9 and $10 a barrel. So if you're a speculator and you're long, in an oil position, you do not want to be long if the oil price is going to fall, you know, $9, $10.

STEPHEN LONG: OPEC oil ministers met less than a fortnight ago and reassured the world they would meet any shortfall in supply relating to the Iraqi war. And David Thurtell says that's been a soothing balm for oil prices.

DAVID THURTELL: The main thing is that there's been indications that OPEC will increase production more or less the day that hostilities break out. And if it doesn't, there will be a release from strategic reserves in Western nations.

STEPHEN LONG: So can motorists expect relief in coming weeks from prices above $1 a litre at the bowser? Well, don't count the money just yet. The worry is US oil reserves at a 27-year low.

And across the OECD, inventories are also at their lowest point in many years. Then there's the instability in Venezuela, one of the world's biggest producers. Production there is only now recovering from a prolonged national strike.

David Hale is the former global chief economist at Zurich Financial Services, and he now advises major corporations across the globe. And he's warning of risks beyond the day-to-day trading.

DAVID HALE: There's no doubt that an American victory will probably set the state for lower oil prices. But again, we also have other problems in the oil market. We have Venezuela. And the Venezuela's led to a big loss now, put over the last few months, certainly here in the Western hemisphere.

So while the price of oil will clearly fall, we don't still quite know where the bottom is, and again we don't know how much damage Saddam Hussein will do to the oil fields.

STEPHEN LONG: David Hale says that the world shouldn't forget what followed the last Gulf War.

DAVID HALE: Well, what it did was it led to a major oil price shock which was a blow to the economies of East Asia. It was a modest blow to the economy of Europe and it did slow the whole world economy down. Then things got better. But in the case of the US economy, we had the most sluggish economic recovery recorded in modern times.

STEPHEN LONG: That oil price related slump in the economy helped lose George Bush Senior the presidency, and his son will be hoping he doesn't suffer the same fate as his father. But whatever the long-term risks, traders anticipate further falls in crude oil prices in coming days. David Thurtell believes they could dip by another US$5 a barrel before they turn around.

DAVID THURTELL: Once it gets to sort of the mid-twenties, on a risk reward consideration, oil's starting to represent good value again. Because if the war goes pear shaped or let's just say there's another snap of cold weather or Venezuela hits problems, if you're an oil consumer, it would've been best to get some sort of reasonably priced oil on board in those twenties. So if the oil price spikes up again, you've at least taken some oil on board.

JOHN HIGHFIELD: David Thurtell is a commodity strategist at the Commonwealth Bank and he was speaking with our Finance Correspondent Stephen Long.

www.globeandmail.com By PATRICK BRETHOUR Thursday, March 20, 2003 - Page B1

S&P/TSX 22.1 6475.58 DJIA 21.15 8286.6 S&P500 1.82 875.84 Nasdaq 5.7 1402.77 Venture -3.72 1059.3 DJUK .06 152.58 Nikkei 144.01 8195.05 HSeng 35.97 9194.56 DJ Net 1.27 43.87 Gold (NY) -3.20 333.00 Oil (NY) -1.24 28.12 CRB Index -0.85 234.17 30 yr Can. +0.02 5.60 30 yr U.S. +0.05 4.96 CDN$ buys US$ +0.0009 0.6764 Yen +0.0300 81.1900 Euro -0.0011 0.6367 US$ buys CDN$ -0.0020 1.4784 Yen -0.1200 120.0300 Euro -0.0029 0.9413

CALGARY -- The spectre of an energy crisis is fading as crude plunged below $30 (U.S.) a barrel for the first time in three months yesterday and other energy prices retreated from record-breaking highs.

For months, oil prices have soared as the market fixated on the dire scenario of an attack by the United States against Iraq pushing already low crude inventories to critical levels, and leading to shortages of gasoline, heating oil and jet fuel.

Now, those fears are evaporating. Stores of crude oil are rising, if only slightly, and the United States is entering a period of relatively low demand for oil, the lull between the winter heating season and the summer, when gasoline consumption peaks.

And millions of barrels of oil are headed from Saudi Arabian ports to the east coast of North America, as the biggest member of the Organization of Petroleum Exporting Countries pumps crude at near-peak production.

Crude oil fell $1.79 to $29.88 a barrel yesterday on the New York Mercantile Exchange, the first time it has closed below the $30 mark since mid-December, when prices began to soar in response to production shortfalls from Venezuela and the rising threat of a war against Iraq. Over the past week, crude has dropped more than $9 a barrel.

Natural gas prices, too, have fallen sharply -- they are down nearly 45 per cent from their late February high -- as frigid weather in eastern North America has given way to spring temperatures.

And pump prices, which hit a record high last week in Canada, are finally starting to ease as the cost of crude moderates.

Another upward spike in the price of oil is possible, but it will be driven by facts -- such as Saddam Hussein destroying Iraqi oil fields during war with the United States -- not inchoate fears, said Vincent Lauerman, global energy analyst at the Canadian Energy Research Institute in Calgary.

"It's the surprise that is going to cause prices to jump back up."

Even if Iraqi sabotage or a terrorist attack does cause oil prices to spike, crude likely will not rise beyond $40 a barrel, Mr. Lauerman said.

Such a rise would be short of the high set in the prelude to the Persian Gulf war 12 years ago, and well short of the predictions of a surge past $50 a barrel that some analysts were floating earlier this month.

Crude is now within OPEC's pricing band for the first time this year, although it is at the upper threshold of that range.

Some analysts are concerned that the market, in shrugging off its fatalism, is now overindulging on optimism in assuming that a U.S. assault on Iraq will be quick and relatively painless. "They are pricing things for perfection right now," said Phil Flynn, a senior energy trader at Chicago-based Alaron Trading Corp.

For now, however, oil is on the decline -- and deflating the bubble in pump prices.

The national average cost of regular gasoline in Canada, after hitting a record high last Tuesday, dropped sharply this week, declining 4.4 cents a litre to 79.6 cents, according to a weekly survey from M.J. Ervin & Associates Inc.

The weekly snapshot of retail prices across the country is taken on Tuesday morning, so it may not fully capture this week's decline in crude prices, which are off more than $5 in the past two sessions.

Typically, a $1 decrease in the cost of oil leads to a 1-cent (Canadian) drop in the price of gasoline. On that basis, gasoline prices could be headed for another steep drop this week.

And not all cities across Canada saw prices drop over the past week: drivers in Victoria and Halifax, for instance, have yet to see gasoline decline, despite a fall in wholesale costs.

"We've seen it in some markets, and there could be more to come in others," said Cathy Hay, a senior associate at M.J. Ervin.