North Sea problems contribute to spike in world oil prices

www.thestar.com Jan. 14, 2003. 01:00 AM Two Norwegian oil fields idled Supply of crude remains very tight

NEW YORK—Oil prices moved back into positive territory yesterday as two oil field closings in the North Sea renewed worries about global supply despite OPEC's weekend decision to raise output.

The Organization of the Petroleum Exporting Countries at an emergency meeting on Sunday increased production limits by 1.5 million barrels per day (bpd), or 7 per cent, to compensate for six weeks of losses of strike-bound Venezuelan supplies.

Crude oil on the New York Mercantile Exchange settled 57 cents (U.S.) higher at $32.25 per barrel. In London, Brent crude broke through $30 a barrel to reach $30.20 a barrel, 53 cents up on the day.

News of two fires on Sunday that halted operations at the 232,000-bpd refinery in Garyville, La., operated by Marathon Ashland Petroleum LLC, helped lift gasoline prices in the United States by 2.41 cents to 89.60 cents a gallon, traders said.

Forecasts of a cold snap in the United States for the period Jan. 10-25 fuelled a rise in heating oil prices by 1.87 cents to 88.40 cents a gallon.

Dealers said the crude rally was triggered by news from Norwegian state oil producer Statoil that two North Sea oil fields shut down yesterday because of technical problems, cutting production by some 165,000 bpd — a minimal amount on a global scale.

"The fact that the North Sea output problem is supporting the market really shows how tight the physical crude supply is," said Lawrence Eagles of GNI Ltd., a broker of futures and options.

Fears that a U.S. assault on Iraq may be only weeks away are helping support prices that late last month hit a two-year high of $33.65 a barrel for U.S. crude.

"I certainly see (U.S.) oil staying above $30 until the Venezuelan situation is sorted out," said Paul Ashby, oil and gas analyst at ABN Amro in Sydney.

Oil from the Middle East takes four to six weeks to reach U.S. shores, while Venezuelan crude, which normally accounts for 13 per cent of U.S. imports, arrives in about five days.

"There are delays in getting oil from the Middle East to the United States, plus OPEC's agreement is for 1.5 million barrels per day; but prior to the strike Venezuela production was about 2.5 million," said David Thurtell, commodities strategist at Commonwealth Bank in Sydney.

Mexico's energy ministry said the country will raise crude oil exports by 120,000 bpd to 1.88 million bpd from Feb. 1 after the OPEC cartel agreed to raise its output. Non-OPEC Mexico is the world's eighth-biggest crude oil producer and one of the top four suppliers to the United States, along with OPEC members Saudi Arabia and Venezuela and non-OPEC Canada.

U.S. President George W. Bush viewed OPEC's decision to raise oil production as "a welcome step," White House spokesperson Ari Fleischer said yesterday.

"The president views OPEC's action to increase production, particularly given the protracted dispute in Venezuela, as a welcome step," he told reporters. "It will increase global energy supplies and support global economic growth."

But there are worries about how much of the extra oil OPEC can actually deliver.

The 1.5 million bpd increase was divided pro-rata among members — meaning Venezuela was also granted its share of the higher output limit despite the 43-day-old strike that has slashed its exports by 80 per cent to 500,000 bpd.

Many others in OPEC have little or no spare capacity to bump up production, leaving Saudi Arabia to provide the lion's share.

The kingdom has moved quickly to implement the OPEC decision, telling oil majors to expect 10-20 per cent more crude in February, industry sources said yesterday.

Crude traders said the hike had reversed Saudi Arabia's January cuts, made to clamp down on quota busting.

Riyadh fears an oil-price shock that would dent demand for its crude should a U.S.-led war in Iraq come before Venezuelan supplies are restored.

Venezuela, OPEC's third-biggest producer, is fifth in world exporter rankings, while Iraq sells up to 2 million bpd overseas under the United Nations oil-for-food program.