<a href=www.menafn.com>Middle East Nort Africa • Financial Network--The Atlanta Journal-Constitution NewsStand - Sunday, April 27, 2003 MICHAEL E. KANELL, Staff

The war with Iraq is over, but the uncertainty is not. And one of the biggest unknowns is how much impact the return of Iraqi oil to the market will have on the wobbly U.S. economy --- and how soon. A lot is riding on the answer. Optimists say Iraqi oil holds the promise of keeping global energy prices down, limiting the influence of the Organization of Petroleum Exporting Countries and offering relief to beleaguered American consumers and companies.

"I think the war changed things in a big way," said economist Ujjayant Chakravorty of Emory University.

Few oil wells were torched by Iraqi troops. No missiles hit Saudi oil fields. No suicide bombers blocked oil ports. As those fears evaporated, the price for oil came down dramatically.

From a prewar flirtation with $40 a barrel, oil prices fell into the mid-$20s.

For a struggling U.S. economy that stumbled again in recent months, the higher prices had threatened a renewed recession, said Rajeev Dhawan, director of the economic forecasting center at Georgia State University

"We definitely dodged the oil bullet," he said.

Still, the ripple from the halt of Iraqi oil production when the war started has yet to even reach U.S. shores.

Oil from Iraq, which had been the fifth-largest supplier to the United States, stopped flowing shortly after the bombs started falling on March 19. Since it takes more than a month for oil to wend its way from the Middle East to the United States, it is too early to assess the effects of the shutdown, said Matt Simmons, chairman and chief executive of Simmons & Company International, a Houston-based energy investment bank.

Oil production in Nigeria has also been disrupted, by political violence.

If the cutbacks in those countries are going to mean higher prices, we should start to see them in the coming days, he said.

Most analysts expect a slow return of Iraqi production and relatively stable oil prices for a few months. And as the flow of Iraqi oil swells, that added supply should nudge prices down.

But there are other possibilities. Many analysts expect the Bush administration to dismantle Iraq's state-run economy in favor of a free market.

Privatization would be a tremendous shock and might delay full production, said Lewis Snider, professor of political science at Claremont University in California, who has lived in the Middle East.

"The politics of this could get really nasty," he said.

The issue is important because timing matters. America's need for gasoline peaks in midsummer.

With most of the world's producers pumping near capacity and the stream from Iraq slowly resuming, gas this year will be available at surprisingly reasonable prices, Snider predicted.

"I don't see too much reason to be anxious about the tightness of supply this summer," he said.

Still, inventories are at historically low levels. With so much oil coming from unreliable places, and with OPEC planning to cut production about 7 percent, an increase in energy needs will leave precious little room between supply and demand, said Jay Hakes, former administrator of the Energy Information Administration.

"I still think we are in the tightest market since the Persian Gulf War. Saudi Arabia helped, but it hasn't offset the oil lost from Iraq."

And other losses are possible. Balance shifts

Crunch time is from Memorial Day to Labor Day. If all goes right, which includes Iraq starting to export oil and Venezuela and Nigeria staying placid, then there will be enough modestly priced gas for Americans.

Unfortunately, that means depending on a lot of coins to come up heads, Simmons said. "The odds are really low that we will have an easy time."

"This market is very vulnerable to any little disruption," Hakes said. "I think OPEC may be misreading the world market. There is not a good supply of oil out there. That could make for fireworks in the next few months. If gas goes to $2 a gallon, that has an impact on the economy."

Short-term questions aside, the war has shifted the balance of oil power.

Iraq's oil reserves are second only to those in Saudi Arabia. While Iraq's decaying industry struggled in recent months to pump 2 million barrels a day, its capacity could be three times that.

As some war-backers argued, a U.S.-friendly Iraq would erode Saudi Arabia's power to shape prices.

The 2001 Cheney Report on energy argued that America must diversify sources for oil and make sure those sources are dependable. "The policy-makers want to move away from the Middle East --- to the Caspian Sea, to West Africa and Latin America," said Daphne Wyshan, a fellow at the Institute for Policy Studies.

A pro-U.S. Iraq would provide one more dependable source. But significant production needs to be resumed first.

Vice President Dick Cheney recently predicted that Iraq will be pumping 2.5 million to 3 million barrels of crude a day by year's end --- better than its production has been for years.

The experts are split on that projection.

First is the problem of legality: Will the United States win United Nations approval to sell Iraqi oil? Would the United States go ahead without an OK?

Niceties of international law aside, dilapidated equipment and transportation bottlenecks could throttle a return to full production, Simmons said. "But it's like a patient who needs an MRI and CAT scan. We just don't know yet."

Even the much-touted estimates of Iraqi reserves are unreliable, he said. "How much oil is there? Nobody has any idea." Politics plays a role

Iraqi oil's impact may depend more on politics than engineering, said Ken Miller, vice president of Purvin & Gertz, an international energy consulting company in Houston.

With the world's large economies weak, Miller said the supply will overwhelm demand and prices will come down.

For American drivers, the idea of cheaper gasoline sounds delightful. But that could spell political disaster.

Middle East oil producers have built economies around oil dollars. When the price plunges, it can savage the standard of living and undermine the compact between people and rulers.

Some analysts scoff at worries about revolution. Still, the danger is obvious from the numbers, Simmons argued. Saudi Arabia has a burgeoning population and a large royal family that has its own kind of welfare. The nation's income has fallen from about $26,000 per person to $6,500 in less than two decades.

"Do the numbers --- unless they are willing to produce another cash crop, they need an average of 10 million barrels a day at $50 a barrel," Simmons said.

Oil prices didn't get to $50 a barrel last year. But during the winter, higher energy costs were seen as a drain on the finances of consumer and company alike.

Price increases are not as costly to the economy as three decades ago, but America cannot run without oil. When the price goes up, we pay. Only if it stays high for a long time do consumers shift their habits and purchases.

That makes the short-run effect of oil prices potentially painful. So, if OPEC's cut forces oil prices up rapidly, that could put a nasty hole in hopes for a recovery. The price equation

High oil prices have been a factor in --- or the cause of --- most of the U.S. recessions since World War II. On the other side of the coin, low prices have added fuel to several booms.

While the fall from prewar levels is welcome, oil prices are still far higher than in late 2001 and early 2002. Back then, gas prices in metro Atlanta were below $1 a gallon. Still, if prices don't climb again, that is a very modest kind of good news.

With the U.S. economy struggling --- job losses up and business orders down --- oil prices are not helping, said John Silvia, chief economist of Wachovia Securities. "But it won't hold us back --- we're already stuck in the mud."

Hopes for renewed growth have been pegged to a resurgence in business spending. But companies have been unsure about the future and hesitant to spend, just like consumers. Higher-than-average oil prices only add to uncertainty, said Dwight Allen, a partner at Deloitte Research.

"At least we know we are not in for a dire, acute situation," Allen said. "But the future is as cloudy as it was before."

Allen is telling his corporate clients to come up with several backup plans, to consider various scenarios and to hedge their bets. This is not a time for gambling, big spending or padding payrolls.

"For the next 12 months, you make only a limited commitment," Allen said.

<a href=www.energypulse.net>Energy Pulse article 4.28.03   Joseph Cacioppo, Director, Coal Services for Evolution Markets, Evolution Markets LLC

A sharp rise in demand due to a cold and snowy winter in the Northeast, a disruption in coal imports, credit problems, and rising energy prices converged this winter to push near term coal prices upward. Producers, end users, and markets should take heed. The volatility in over-the-counter (OTC) coal markets highlighted the price risk faced by market participants. Companies that hedged this risk prior to winter softened the blow from a run up in prices. Recent OTC market activity illustrates the benefits of instituting hedging strategies, whether you are a producer, end user, trader, or marketer.

Big Chill, NS Supply Crunch Converge

The big chill started it off. This winter was considerably colder in the Northeast than in recent years. In addition, unusual amounts of snowfalls blanketed the region. The vagaries of Mother Nature contributed to an increase in power demand from November to mid-March. During that time burns were up and coal stockpiles were down.

Credit issues for utilities impacted their willingness to tie up cash with coal purchases to refurbish their stockpiles. Rather than pile up cash at their plants, utilities conserved funds. At the same time utilities were not fully hedged against price movements for when they really need to return to market. Market watchers feel there will be a flurry of activity to replenish supplies, especially in the second half of this year.

Further complicating matters was a supply crunch from producers serving Northeastern power producers. There was a virtual shutdown in production from Venezuela. First a general labor strike shuttered mines. Later, even as coal miners prepared to go back to work, a continued strike in the oil sector inhibited coal producers ability to ramp up operations to meet export demand. Venezuelan mines went back online in February, but the incident highlighted the political risks involved with taking coal out of the region. Much of the coal from Venezuela bound for the U.S. was a 1.2#, high-BTU coal very near compliance specs for American power producers.

Those caught short during the shutdown turned to regional compliance coal supplies on the NS. Unfortunately, NS coal took a blow in supply at about the same time imports dried up. A major supplier in the region, Horizon Energy entered into bankruptcy – severely restricting supply for coal buyers on the eastern seaboard. Horizon’s demise compounded the Venezuelan problem, leaving the east coast with tight supplies of compliance coal during an unusually cold winter.

Perhaps the best representation of the impact of eastern coal shortfalls is the in the spread between the CSX and NS coals. In past years, the NS compliance coal has traded at a premium to CSX, but the difference was always between $0.10 and $0.25 per ton. Lately, the spread has widened significantly to between $0.50 and $1.00 per ton.

These demand and supply factors alone can account for the run up in coal prices for 2003, but there another – more esoteric –- factor impacted the market. The increase in coal prices coincided with the general rise in energy prices from heating oil and petroleum to natural gas and power. The correlation between the price of coal and other domestic energy commodities is subject to perennial debate in the industry. Some argue that coal production is constant and coal plants are mainly baseload generation and therefore not subject to dispatch based on natural gas or oil prices.

True, but the rise in coal prices over the last five months closely mirrors the NYMEX natural gas price curve. Mark it up to perception over reality that creates a psychological – if not entirely real – connection. Many of the largest volume traders in coal are also active traders in other energy commodities. Speculation plays are likely being made across the board for energy commodities, ultimately moving coal in OTC markets.

Numbers Tell the Story

And, the moves in OTC markets over the winter have been significant. Prices in CSX <1% coals were particularly indicative of the upward trend in coal prices. At the onset of this winter season, CSX coal delivered in the second quarter of 2003 was trading for $26.40, but near the end of the first quarter of this year it was trading for $31.50 – a 16 percent increase. The outer delivery dates were equally impacted. CSX coal for the back half of 2003 rose to $33.25 from $28.25 from November 2002 to the tail end of March 2003. This represents a 14 percent increase, which is also reflected in coal being sold in the spot market for the next calendar year.

Physical Hedging Protects Bottom Line

The recent volatility in OTC coal markets points to the changing relationship of producers and end users. Both are now adept at using the OTC market to hedge price risk and manage inventories. Some are getting smarter at looking at buying and selling coal as a hedge game that can protect the bottom line from major price swings like we’ve experienced this winter.

Hedging, at its most basic, is an offset of a natural position. Both producers and end users – as well as traders and marketers – can take simple steps to hedge price risk in increasingly volatile OTC coal market.

Producers Maximize Profits

Even as prices rise, coal producers face the risk that they will enter into contracts at prices that will ultimately be below market or that they will be caught short on supply contracts and forced to turn to the market and pay dearly to meet supply obligations. Both scenarios can be easily hedged in OTC markets.

For instance, a producer could have gone to the OTC market last fall and purchased several trains of rail coal, such as CSX <1%, for the second quarter of 2003 at $26 a ton. If the price did not change, the producer could have applied the OTC purchased coal to a contract with one of its utility customers – leaving coal in the ground for future sales.

But, the price went up and eventually hit more than $33 a ton for Q2 ’03 CSX <1%. The producer could, as above, apply the OTC coal toward its supply obligation. Or, it could take advantage of the market’s upward swing by selling the OTC coal into the market – taking a $7/ton profit – and sell its own coal at the elevated price.

End Users Play Time Spreads

Price spikes can be particularly painful for end users who may have to cover short inventories or have an unusual spike in demand. But they, too, can use OTC coal markets to hedge their price risk – and do so while being sensitive to cash concerns.

An end user that may be slightly short coal during a price upswing, can execute a ‘time spread’ hedge in the OTC market in order to soften the blow of purchasing coal at its peak. By purchasing ‘outer coal’, or coal in the latter quarters of a calendar year, it can play off the difference price spreads.

For example, an end user that may be short coal in Q2 ’03 can turn to the OTC market to meet these supply needs – while also buying Q3-Q4 ’03 coal in the OTC markets as a hedge. As Q2 coals rallied in price, this should also drag up the back part of the forward price curve. The end user can later sell the coal purchased in the back half at a profit and use these proceeds to flatten out the balance sheet already in the red from increased short-term coal prices.

Derivatives an Option, Too

The examples above are simple hedges that can be made in the physical OTC coal market. There are, of course, financial hedges or derivatives that can also have the same benefit of protecting against major price swings.

Options plays can protect buyers and sellers against just the type of price risk we have outlined here. Producers looking to take full advantage of price upswings can buy call options that provide them the right but not the obligation to buy coal at a price that may be below the market rate in the future. If the price of coal goes above the option strike price, the producer can exercise the option and then sell the coal at the prevailing market – taking a profit.

Options also provide end users particularly good hedge opportunities. An end user can protect against upward swings in the market by purchasing a similar call option, but this time locking in a price that may be less than the market price in the future.

With many market players, especially utilities and producers, increasingly taking efforts to conserve cash, the options market remains relatively dormant. Nonetheless, market players continue to turn to the OTC market for physical hedges, and there are counterparties available to gain similar results in financial derivative products.

Readers Comments 4.28.03 william grebenc "well written concise, nice snapshot on using traded mrkt to manage risk"

PlanetArk.org BRAZIL: April 28, 2003

RIO DE JANEIRO, Brazil - Investment in new electricity generation projects is important for the growth of Brazil's primary aluminum sector, the head of the Brazilian aluminum association (Abal) said.

It's also necessary also for the continuing presence of this energy-intensive sector in Brazil, said the association's president Joao Beltran Martins.

"Without competitive energy, Brazil's producers can't survive. We are investing to keep our facilities operational. I see no other options," Beltran told Reuters in an interview this week.

Due to the $5 billion investments underway in energy generation in the sector, it's unlikely Brazil's aluminum production will fall in the near future, he said.

"But it is possible output will not grow further once current expansions are completed," Beltran said.

Brazil's aluminum sector should produce a record 1.45 million tonnes of primary metal this year, following the conclusion of expansions delayed by energy rationing in 2001-2.

The sector generates only 13 percent of its own electrical energy, although once the various new projects are completed, self-sufficiency should exceed 50 percent, according to Abal.

LACK OF ENERGY RULES

Beltran however pointed out some projects are being slowed down or complicated by lack of government regulation of the energy sector, transmission costs from remote areas and regional differences in environmental legislation.

"The government still needs to regulate everything to do with the energy sector," he said. "The cost of energy in the free market could change."

Local free-market spot energy costs fell after Brazil ended energy rationing to a fraction of international costs.

However, many smelters are reported to be unable to benefit from low spot market prices because, being intensive users, they are obliged to buy from utilities at contracted prices.

In addition, investment in energy generation is costly.

"The cost of energy also depends on the generator's location. Transmission fees can make certain locations unviable," said Beltran, also president of producer Alcan Aluminio do Brasil, a unit of Canada's Alcan Inc. (AL.TO).

The average cost of energy used by Brazil's existing aluminum smelters is $20-22 per megawatt hour, Beltran said, adding that more than $22 is considered unviable by the sector.

"Energy costs for the aluminum sectors in Venezuela, Iceland, the Middle East and China are all cheaper than in Brazil, although we do have the advantage of having internationally competitive manpower," he said.

"We also need adequate federal environmental legislation," Beltan said. Some new hydro projects are being held up by local environmental lobbies despite having gained operating licenses from federal electrical energy regulatory agency Aneel, he noted.

Brazil has excess electrical energy due to recent heavier than usual rainfall, which has filled the country's reservoirs and ensured full operation at the country's hydroelectric plants, accounting for 90 percent of total electricity output.

However, Beltran admitted speculation is rife in government circles that a new period of rationing could occur in 2005. "Everything depends on rainfall levels. But we have to remember we have thermoelectricity as well," he said.

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Sunday, April 27, 2003 By: Patrick J. O'Donoghue

Venezuelan baseball player Miguel Cabrera has become hot property in the US minor leagues after he was named player of the week in the Southern AA League. 

Florida Marlins scouts say they happy with Cabrera's performance as infielder and batter. During the week in question, Cabrera has earned a .517 average, which includes 7 runs, 7 doubles and 11 runs batted in (RBIs). 

The 20-year old Aragua born player also succeeded in robbing 5 bases in 6 attempts which says a lot for improvements in his speed- running placing him second place in the league. Commenting on his record this season, scouts says he has 25 rbi runs, 32 hits, 10 double hits, 14 extra bases and a slugging record of .646 points. 

• Marlins bosses forecast that he will playing for the major league team before the end of the season.

Meanwhile, Venezuelan Magglio Ordonez helped his team Chicago White Sox to a 7-4 victory over the Minnesota Twins this week hitting two home runs. Ordonez hit  one home run in the fourth innings and added another against Venezuelan Johan Santana in the eighth innings. 

Ordonez, who hails from Falcon State, also had 3 RBIs, reaching 18 this season and lifting his batting average to .300 with his two home runs in four turns at the bat. Santana managed 5 punch outs and suffered two home runs against him, one of which came from Ordonez.

<a href=www.voanews.com>VOA News 27 Apr 2003, 18:03 UTC

Peru has granted asylum to two Venezuelan army officers who fear reprisals for their opposition to President Hugo Chavez's government. The men, Wismerck Martinez Medina and Gilberto Landaeta Vielma, took refuge in the Peruvian embassy in the capital Caracas last week.

Peru's Ministry of Foreign Relations issued a statement Sunday, saying the two retired officers would travel to Peru as soon as Venezuela approves the move.

The men have been accused of participating in a massive protest against Mr. Chavez in October.

Meanwhile, the Dominican Republic is studying an asylum request from two other army captains who took refuge in the country's embassy last week.

The attorney representing brothers Ricardo and Alfredo Salazar says the men have received death threats for their alleged role in a failed coup against President Chavez last April.

The four officers are the latest Chavez opponents to seek asylum.

In March, Venezuelan labor leader Carlos Ortega went into exile in Costa Rica to avoid prosecution for treason for organizing a two-month strike that failed to oust President Chavez.

The president's opponents accuse him of driving the world's fifth-largest oil exporter into economic ruin and trying to model the country after communist-run Cuba. Mr. Chavez says his enemies seek to undermine his self-styled revolution.