Crude jumps ahead of emergency Opec meeting

news.ft.com By Nerma Jelacic in London Published: January 10 2003 12:55 | Last Updated: January 10 2003 13:14

Brent crude oil prices reversed early losses in London on Friday as investors reacted to latest developments in Iraq and ahead of an emergency Opec meeting this weekend.

Observers said the threat of war in the Gulf region seemed to have receeded after a mixed report from UN inspectors in Iraq gave ammunition to both the supporters of the US preparation for a possible war and for the peace doves.

Hans Blix, the head of the UN weapons inspections team, said on Thursday his team had yet to find evidence that Iraq had weapons of mass destructin and that the inspections would need more time.

However, in his speech to the United Naitons, he added that Iraq had failed to answer key questions on the weapons issue.

While in the US analysts chose to concentrate on the second part of Mr Blix's speech, their European counterparts found the threat of war diminishing after some comments from British prime minister Tony Blair.

Mr Blair, up to know the key US ally, indicated that the weapons inspectors should get more time to complete their work.

Other European nations, including Germany, argued that there was no reason for a military attack against Iraq at present.

IPE February Brent stood 21 cents higher at $29.85 a barrel having closed at $29.19 a barrel in the previous session.

"Traders will have to balance pre-Opec meeting concerns with fears of weekend developments in the Gulf and Venezuela in determining their positioning today," said Lawrence Eagles, an analyst with GNI Research.

Apart from the situation in the Gulf, investors were awaiting the decision of an emergency Opec meeting on Sunday which is expected to agree an output increase to help compensate for supply losses from the Venezuelan strike which has now entered its 40th day.

Opec members are considering how best to implement the necessary replacement of between 1m and 1.5m barrels a day lost through the strike.

"The Opec ministers are debating how best to accomplish this without worrying the market that the announced increase will be perceived as either under-supplying or over-supplying requirements," said Adam Sieminski, an analyst with Deutsche Bank.

The head of the Energy Information Administration, Guy Caruso said that an Opec increase of up to 1.5m barrels a day would make a dent in offsetting the lost Venezuelan crude, but there was a need for more oil.

"We believe that the world supplies will be insufficient to meet world demand this month and possibly throughout February as well," said Mr Eagles.

He added that the gap would not be huge, but with world oil stocks at low levels this will represent a significant tightening of the world oil market.

"This, coupled with Iraqi war fears, should keep prices above the $28 a barrel Opec basket benchmark, but similarily prices are unlikely to surpass the recent highs," he added.

This was echoed by Mr Sieminski: "Despite the shift toward more negative sentiment on oil, we believe the bullish case remains more persuasive in the near term," he said.

"Inventories are already very low, Venezuela remains in turmoil until August elections, fighting in Iraq is coming in February or March - and recovery from those dynamics will be slow. Inventories stay low and oil prices stay high," Mr Sieminski added.