FUTURES MOVERS - Oil gains on output concerns - OPEC to raise output 6.5%; some fear it's not enough

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 4:11 PM ET Jan. 13, 2003

NEW YORK (CBS.MW) -- Oil prices climbed back above $32 a barrel Monday, with traders expressing doubt that OPEC's increase in production of 1.5 million barrels per day would arrive fast enough or be sufficient to cover the shortfall from Venezuela's oil strike.

The output increase of 6.5 percent, to 24.5 million barrels a day, is to take effect Feb. 1, the oil cartel said. OPEC also said it would review the decision at its next regularly scheduled meeting in March. Read full story.

February crude closed at $32.26 a barrel on the New York Mercantile Exchange, up 58 cents, after falling to a low at $31.13 earlier in the session. In London, the Brent contract on the International Petroleum Exchange rose 53 cents to $30.20.

"This increase should be enough to keep the Venezuelan disruption in check," Tyler Dann, an analyst at Banc of America Securities, told clients Monday, "assuming that OPEC is able to fully increase actual production volumes by the amount of this quota change and combined with the release of extra inventories maintained by certain members of the organization."

Alaron.com senior energy analyst Phil Flynn said that the increase is "great," though it comes "too little, too late to ease this current supply crisis developing in the U.S. and throughout the world."

The latest production hike won't take effect until Feb. 1, and it'll take five or six weeks for the extra oil to reach the U.S. Prior to the meeting, cartel members said the quota limits could change if the situation in Venezuela is resolved.

"The increase to go into effect two weeks from now will do little to ease tightness and in fact, in two weeks our supply levels will fall to critically low levels," Flynn said.

He added: "We're falling further and further behind to replenish our stock levels ... losing 2 million to 3 million barrels per day from Venezuela."

That adds up to 14 million to 21 million barrels per week and in five weeks, a loss of some 70 million to 105 million barrels, Flynn said.

On that note, the OPEC hike "will not bring that many incremental barrels into the market to make up for production lost as a consequence of the Venezuelan crisis," Mike Fitzpatrick, an analyst at Fimat USA, told clients Monday.

Venezuela's strike began on Dec. 2. Production there dropped below 200,000 barrels per day at its lowest point, from the usual 3 million barrels per day. Opponents of President Hugo Chavez have been calling for his resignation or for new presidential elections.

Supplies can't cover loss of Iraq output

Oil production from Iraq could also be removed from the global market if war breaks out with the U.S., as expected within the next two months, said Dann. Iraq exports about 2 million barrels per day under the U.N.'s food-for-oil program.

If Iraq exports are affected, OPEC would "likely need at least some help from non-OPEC producers to keep the market from overheating," Dann warned.

Analysts say they're concerned about OPEC's ability to cover lost oil in the event of a U.S. war with Iraq on top of Venezuela's shortfall. Analysts pegged OPEC's spare capacity at around 3 million barrels, which would fall short of covering a total of around 5 million barrels lost from OPEC members Venezuela and Iraq. See related story.

During Sunday's meeting, cartel members said they could provide another 4 million barrels to the market, "which is a bit more spare capacity than generally thought," said Fimat analyst John Kilduff.

The cartel "remains determined to take whatever measures, as and when deemed necessary, to maintain oil price and market stability, and states that the market will be continuously and carefully monitored," according to OPEC's agreement Sunday. OPEC set its next meeting for March 11 in Vienna.

"Prices have not reacted [much] because a production deficit remains with Venezuela's 2 million barrel per day product off the market," said Kilduff.

For now, Fimat expects that "the market will continue to react nervously to headlines waxing and waning between psychologically important $30 and the recent high of $33.65," Fitzpatrick said.

"With war looming and the Venezuelan loss just balanced at the low end of a comfortable range for global inventories," Banc of America's Dann expects prices to remain "at least in the high $20s, if not in the $30s in the near-term."

High prices on tap

As the potential war with Iraq draws near, however, "consumers should expect some of the highest crude oil and gasoline prices and heating oil prices since 2000," said Kilduff.

In 2000, retail gasoline prices reached $2 and "the spike in energy prices had a hand in the economic slowdown that the global economy is continuing to emerge from," he said.

Tom Kloza, chief oil analyst at The Oil Price Information Service pointed out that the gasoline industry normally has a "tough time handling the transition from winter to summer blends and they will have real problems if there is no Venezuelan refinery production or a limping industry [from refinery maintenance and outages] at the time."

The situation is Venezuela "cannot be overstated," Kilduff said, given that the chemical composition of the country's crude oil is "unique and cannot be easily interchanged with the lighter, sweeter Middle Eastern crude."

"Iraq is a further price spike for another day," he said.

Also Monday, two oil fields in the North Sea were shut down due to technical problems. The fields account for about 165,000 barrels per day of production "which is not much," said Dailyfutures.com President Todd Hultman, "but the news caught the market at a nervous time."

Against this backdrop, February unleaded gasoline climbed 2.71 cents to 89.91 cents a gallon. February heating oil closed at 88.38 cents a gallon, up 1.85 cents.

Meanwhile, concerns over the eventual rise in oil market supplies pressured most oil-service stocks. The Oil Service Index ($OSX: news, chart, profile) closed down 2.4 percent. See Energy Stocks.

In other energy news, February natural gas rose 10.8 cents to $5.251 per million British thermal units "as much of the U.S. braces itself for the coldest weather of the season," according to Fitzpatrick.

Nymex gold futures close flat

Gold futures prices closed little changed Monday, holding above $355 an ounce amid uncertainty over North Korea and volatility in the broader U.S. stock market. See Metals Stocks.

Soybean futures fall

Over on the Chicago Board of Trade, soybean futures fell, pressured by rain in Brazil over the weekend that'll likely benefit crops, according to Todd Hultman, president of commodity information provider, Dailyfutures.com.

March soybeans fell 8 3/4 cents to 548 cents a bushel. March wheat also declined 8 cents to close at 311 1/4 cents a bushel, and March corn slipped 4 1/4 cents to 230 1/2 cents a bushel.

Hultman said last week's export inspections were twice the estimated pace for soybeans at 32.5 million bushels.

Meanwhile, wheat inspections were roughly as estimated at 19.7 million bushels and corn was below the expected pace at 28.1 million bushels.

Corn was pressured after the government Friday raised its estimates for stocks at the end of the 2002 to 2003 year by 81 million to 924 million bushels, Hultman said.

The Reuters/CRB Index, broad-based measure of the commodity futures market, closed at 239.2, down 0.4 percent. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.