War Fever, Venezuela Drive U.S. Oil to $34.50

www.morningstar.ca 21 Jan 03(6:51 AM) |  E-mail Article to a Friend By Richard Mably

LONDON (Reuters) - World oil prices surged to fresh two-year highs on Tuesday as the United States urged the U.N. Security Council not to shirk difficult choices on Iraq and a military build-up in the Gulf fuelled speculation that war is looming.

U.S. light crude in electronic trade set a high of $34.52 a barrel, its highest since December 2000, and by 1100 GMT was up 55 cents at $34.46. London Brent blend added 40 cents to $31.05 a barrel.

The strike in Venezuela that has sapped oil exports since early December and the killing in Kuwait of a Defense Department employee near a U.S. military base also helped pull prices higher.

Foes of President Hugo Chavez on Tuesday extended a nationwide strike into the 51st day, aiming to force the leftist leader to resign and call immediate elections.

With Venezuelan exports running at just 500,000 bpd, a fifth of normal flows, commercial crude stockpiles in the United States are close to 26-year lows.

"A lack of adequate commercial oil stocks in the U.S. and no nearby replacement for lost short-haul crude from Venezuela has left the oil supply chain stretched almost to breaking point," said London's Centre for Global Energy Studies.

"OPEC alone does not have sufficient readily available spare capacity to replace both Venezuela's and Iraq's oil exports, much less to cope with any supply disruptions from other Gulf producers that might result from any prolonged conflict in Iraq," the CGES said in a report to clients.

OPEC's biggest producer Saudi Arabia already is tapping into the world's only significant spare capacity. Industry sources told Reuters at the weekend that Riyadh could reach nine million bpd by February, up a million bpd from December flows.

If OPEC is unable to cover a dual outage from Iraq and Venezuela, the Paris-based International Energy Agency is expected to release some of its huge emergency strategic reserves for the first time since the Gulf War, in January 1991.

"Were an attack to be launched on Iraq, consuming country governments would have to utilize quickly their abundant strategic oil stocks to ensure adequate supplies," said the CGES.

U.S. officials show no sign of softening their line against Baghdad ahead of a major report on January 27 from U.N. weapons inspectors on whether Iraq has met disarmament commitments.

Secretary of State Colin Powell, addressing fellow Security Council members on Monday, said: "We must not shrink from our duties and our responsibilities when the material comes before us next week. We cannot be shocked into impotence because we are afraid of the difficult choices that are ahead of us."

Chief weapons inspector Hans Blix delivers his judgement to a full U.N. sitting next Monday and the 15-member Security Council evaluates the report on January 29.

Blix spoke to reporters in Athens after a two-day visit to Baghdad. "The Iraqis became aware that the world is disappointed with their declaration," he said of Iraq's 12,000 page dossier.

"We feel the declaration has not answered a great many questions."

Iraq said on Monday it would offer the inspectors more help and would form its own teams to search for any banned weapons.

Blix said that Baghdad had refused to allow U2 reconnaissance flights over its territory. "They put up a number of conditions that were not acceptable to us," he said.

Iraq wants to accompany the planes with its own aircraft, but would be prevented from doing so if the weapons inspectors flew to the north or south of the country because of no-fly zones patrolled by U.S. and British planes since 1991.

Britain said on Monday it was mobilising some 30,000 troops to join the tens of thousands of U.S. troops already in the Gulf.