War Fever Supports Oil As Venezuela Strike Cracks

www.morningstar.ca 21 Jan 03(12:52 PM) |  E-mail Article to a Friend By Richard Mably

LONDON (Reuters) - World oil prices set new two-year highs on Tuesday for fear of war in Iraq and then eased as cracks started to appear in a Venezuelan strike that has cut deep into exports to the United States.

U.S. light crude at 1745 GMT was down 21 cents at $33.70 a barrel after setting a fresh high of $34.52 in early electronic trade. London Brent blend eased 39 cents to $30.26 a barrel. President George W. Bush said it was now clear to him that Iraqi leader Saddam Hussein was failing to comply with U.N. disarmament demands.

"He's delaying. He's deceiving. He's playing hide and seek with inspectors," Bush told reporters at the White House. "It's clear to me now that he is not disarming ... Time is running out."

Oil dealers said the remarks appeared to leave little doubt that Washington was now close to authorising the use of military force against Baghdad.

But early price rises were contained by news from Venezuela that tanker pilots in Lake Maracaibo, a strategic export route, had ended their part in the seven-week-old nationwide strike.

"This is something that helps Chavez. A prerequisite to restart production is to get exports going, so this is a step in the right direction," said George Beranek of Washington's Petroleum Finance Company.

While an end to the tanker pilots' action in Venezuela can be expected to boost exports, shippers said deliveries were not likely to rise rapidly until foreign ship operators began using ports again.

Most of the opposition to President Hugo Chavez extended their strike into a 51st day, aiming to force the leftist leader to resign and call immediate elections.

A spokeswoman for striking oil workers said they intended to send a senior representative to Maracaibo later on Tuesday to try to persuade the pilots not to abandon their action.

"We still have 90 percent of oil workers on strike," she said.

LONG ROAD

Even an end to the strike might not bring lower oil prices immediately.

"It will be a long, hard road for Venezuela even back to 75 percent of previous production capacity," said Geoff Pyne, consultant to Sempra Energy.

"There is still the threat of war in Iraq and stocks are very low. Traders are going to see it as dangerous to sell at this point."

With Venezuelan exports running in recent weeks at just 500,000 barrels a day, a fifth of normal flows, 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 be pumping nine million barrels daily by February, up a million barrels a day 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 emergency strategic reserves for the first time since January 1991 during the Gulf War.

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

Oil dealers are counting down toward a major report on January 27 from U.N. weapons inspectors on whether Iraq has met its disarmament commitments.

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."