Oil surges on war clouds

By Beth Heinsohn in New York 31dec02

CRUDE oil prices surged today, setting new two-year highs in New York as momentum built behind a rally ignited by global oil supply worries with expectations of higher prices for Australian businesses and motoirsts. The five-week old nationwide strike in Venezuela and US-Iraq tensions continue to fuel worries about oil supply.

The strike in Venezuela, source of 15 per cent of United States oil imports in October, shows little sign of easing, as neither President Hugo Chavez's Government nor the opposition are backing down.

A loss of oil supply from both Iraq and Venezuela would be more than the Organisation of Petroleum Exporting Countries could make up, analysts say.

"The Venezuela strike is not ending, and the flow of US troops and supplies to the Persian Gulf is increasing," said BNP Paribas analyst Tom Bentz. "There's no sign of any reprieve."

The chief executive of the Australian Service Station Association, Ron Bowden, said motorists could be paying up to $1.05 per litre for petrol next month because of the strike in Venezuela and fears of war in Iraq.

Mr Bowden said the situation would also shift the mid-point in the cycle of price rises and falls from 92 cents a litre to the "high nineties".

"The supply and demand balance has taken a hit on the supply side," Mr Bowden said.

"We are on the other side of the world but we're not immune. We are going through this oil company-imposed price cycle - that goes through a 10 to 12 cent movement."

February crude oil futures on the New York Mercantile Exchange shot up by US93 cents to hit a high of $US33.65 a barrel. February Brent-blend crude oil futures on the International Petroleum Exchange in London were up as much as 86 US cents at a high of $US31.02.

Prices in New York are closing in on highs not seen since December 2000. The high set on December 1, 2000, was $US34.15 a barrel. The front-month contract closed at $US33.80 on November 30, 2000.

Prices were spurred upward at that time by a period of high tension in the Middle East. Ultimately, former US president Bill Clinton was moved to release oil from the Strategic Petroleum Reserve, ostensibly to head off a shortage of heating oil that winter.

The administration of President George W. Bush has thus far shunned that option, saying a severe supply emergency doesn't yet exist. The administration, however, has allowed oil companies to delay required deliveries of crude to the reserve.

The strike in Venezuela has paralysed crude oil production and refinery output of products such as petrol and heating oil, cutting exports of both oil and refined products to almost nothing. Venezuela has taken the unusual step of importing petrol from Chile, Trinidad and Brazil for domestic use. State-owned oil monopoly Petroleos de Venezuela SA lost more than $US1.3 billion ($2.32 billion) in December due to the strike.

Chavez was adamant in his resolve during his weekly television show Hello Mr. President.

"I will not retire, I will go on the attack, the offensive," Chavez said yesterday.

He said he is winning the oil war and used the takeover of the Yagua distribution plant in Carbobo State as an example of his offensive to break the strike. The opposition says those efforts aren't bearing much fruit.

The continuing confrontation is fuelling the rise in oil prices.

"After crude's strong finish on Friday, all the funds needed to see was (Venezuelan President Hugo) Chavez going toe to toe with the opposition over the weekend and they came out buying with both hands," said Ed Silliere, a trader with Energy Merchant Corp in New York.

Analysts and traders remain sceptical about a fast return to normal crude oil supply from Venezuela even if the strike were to break.

Reports from PdVSA on Saturday that current crude oil production was higher at about 600,000 barrels a day compared to a week ago didn't do much to damp crude oil price's ascent last night and so far today.

Weekly inventory reports from the American Petroleum Institute and the Department of Energy's Energy Information Administration are expected to finally show sizable drawdowns as a result of the massive disruption to the production of crude oil and refined products in Venezuela.

Even reports that OPEC might boost output to cool prices didn't do much to slow the rally, with oil futures in New York and London falling about US30 cents from their highs but remaining well up on the day.

"The OPEC news put a softer tone on things, but market sentiment still sees further upside," a broker in London said.

AP,AAP