Crude falls ahead of OPEC summit

By Myra P. Saefong, CBS.MarketWatch.com Last Update: 10:39 AM ET Jan. 10, 2003

February crude traded at $31.50 a barrel on the New York Mercantile Exchange, down 49 cents.

The contract gained more than a dollar, or 5 percent, Thursday on doubts that OPEC members can pump enough extra oil to replace production lost to Venezuela's oil strike and the potential disruption of supplies from Iraq.

OPEC members agreed to hold an emergency meeting this Sunday to discuss increased production targets, with Saudi Arabia reportedly supporting an output hike of 1.5 million to 2 million barrels per day.

"An increase of more than 1.5 to 2 million barrels per day will cause prices to stabilize and perhaps fall," John Kilduff, an analyst at Fimat USA told clients Friday, while "anything less than 1.5 million barrels per day will be viewed as insufficient and prices will probably continue to rise."

Analysts have said that it takes around five weeks for oil shipments resulting from the hike to show up on U.S. shores, and with OPEC not expecting to implement its increase in quotas until Feb. 1, traders are doubtful of OPEC's ability to help supplies in the near term.

The cartel has also said it plans to cancel the increase in production once the strike in Venezuela, which began on Dec. 2 in opposition to President Hugo Chavez, is resolved.

"Even if the strike is settled today, the Department of Energy estimates that it will take about four months [for Venezuela] to reach production levels attained before the strike," said Kilduff, adding that both the opposition and supporters of Chavez seem far apart and adamant in their demands.

Against this backdrop, "OPEC will probably not increase production enough to make up for that lost from Venezuela," he said. The South American nation produced around 3 million barrels a day and comprised more than 10 percent of U.S. oil imports prior to the strike.

Concerns over OPEC's ability to cover lost oil in the event of a U.S. war with Iraq on top of Venezuela's shortfall have also surfaced. Analysts pegged OPEC's spare capacity at around 3 million barrels, which would fall short covering a total of around 5 million barrels lost from OPEC members Venezuela and Iraq.

Iraqi President Saddam Hussein is "a wild card and there is no telling what he might do," said Kilduff. If a war starts, prices could spike higher, he added.

The latest reports on U.S. crude supplies, both released Wednesday, however, failed to reflect much of an impact from Venezuela's 40-day oil strike.

The American Petroleum Institute said crude supplies fell by only 2 million barrels to total 275 million barrels during the week ended Jan. 3. The Energy Department said crude supplies actually rose by 400,000 barrels to 278.7 million barrels. See full story.

In other Nymex trading, February unleaded gasoline declined by 0.75 cents to 88.5 cents a gallon. February heating oil also fell by 0.6 cent to 86.9 cents a gallon.

The losses in petroleum futures also weighed on most oil-service stocks. The Oil Service Index ($OSX: news, chart, profile) was down 0.3 percent.

Natural gas slips

Also on Nymex, natural-gas futures fell in delayed reaction to the latest government report on supplies, which revealed a smaller-than-expected decline in last week's stocks.

February natural gas fell by 7.4 cents to stand at $5.23 per million British thermal units.

The Energy Department reported early Thursday that natural-gas supplies fell by 86 billion cubic feet to 2.331 trillion cubic feet during the week ended Jan. 3.

Fimat predicted a 109 billion cubic foot decline and estimates ranged between a 60-billion and 110-billion-cubic-foot draw. A year ago, inventories fell by 199 billion cubic feet.

Supplies are now 459 billion cubic feet lower than last year at this time and 2 billion cubic feet below the five-year average, the government said.

Weekly declines of 111 billion cubic feet are needed in the remaining 12 weeks of the withdrawal season for inventories to drop to about 1 trillion cubic feet by March 28.

The Reuters/CRB Index, broad-based measure of the commodity futures market, traded at 241, down 0.1 percent. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.