FUTURES MOVERS - Oil futures lower on strike halt efforts - Natural gas surges as cold weather lifts demand

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 2:58 PM ET Jan. 22, 2003

NEW YORK (CBS.MW) -- Progress toward a resolution to Venezuela's eight-week strike pulled crude futures prices lower Wednesday, ending the commodity's six-session rise.

But doubts that an end to the strife would remedy tight oil inventories lingered.

The price of a barrel of crude for March delivery closed at $32.85, down 34 cents on the New York Mercantile Exchange. Prices had been climbing since Jan. 13.

The contract traded as high as $33.45, but fell as low as $32.65 during Wednesday's session. The February contract rose as high as $35.20 on its expiration day Tuesday, the highest since November 2000.

Also on Nymex, cold weather boosted demand for natural gas, lifting prices for the heating fuel to highs not seen in two years.

Gold futures closed just short of $360, taking cues from the U.S. stock market and developments in Iraq. See Metals Stocks.

Some of Venezuela's striking oil tanker pilots returned to work this week following a government deal to get back wages, according to Bloomberg News.

Leaders from the U.S. and five other democratic countries are expected to meet in Washington to discuss ways to help Venezuela end the standoff between President Hugo Chavez's supporters and the opposition.

Former U.S. President Jimmy Carter has traveled to Venezuela attempting to mediate the dispute, and proposed an election plan that both sides are studying.

But "despite all the talk of resolving the Venezuelan problem, I do not believe that there will be any easy solution soon," said Dailyfutures.com President Todd Hultman.

Even if the crisis were resolved tomorrow, it could take months for the oil industry to get production back to where it was before the strike, Hultman said.

John Mesrobian, president of Constantinople Advisors, said, "Pilots can go back to work but, who is pumping and producing the oil to pump into the empty tankers?"

Chavez' government has claimed that daily oil output is at around 1 million barrels, but strikers have said it's running at half that amount. Venezuela produced around 3 million barrels per day before the strike began.

Meanwhile, a Saudi Arabian ambassador to the U.S. said Wednesday that Saudi Arabia was prepared to raise its oil output if prices don't drop back below $28 in the next few weeks. He didn't, however, note how much of an increase the country, an OPEC member and the largest oil producer in the world, was willing to make.

OPEC agreed earlier this month to raise its member production by 1.5 million barrels, excluding Iraq, to 24.5 million barrel per day beginning Feb. 1 in an effort to offset oil lost due to Venezuela's strike.

Iraq stays in view

"While the situation in Venezuela is important to the crude oil market, the upcoming war with Iraq is having a far greater impact on prices and the anxiety that traders are feeling," said Hultman.

"War in the equation elevates the level of uncertainty to greater heights and makes forecasting impossible," he said.

U.N. weapons inspectors, which began their search for weapons of mass destruction just before Thanksgiving, will deliver a report on the search and any findings to the United Nations Monday.

The oil market questions just how high prices can go and for how long if a war does erupt and Iraqi President Saddam Hussein doesn't flee in exile peacefully, said Infinity Brokerage Services' head financial analyst John Person. "This is why there is a diplomatic party trying to intervene in Venezuela."

Historical moves

Even though crude prices slipped Wednesday, the commodity has shown amazing resilience in recent days and they're still up about $2 from the close on Jan. 10, when the six-session rise began.

Michael Armbruster, an analyst at Altavest.com, explained that the current situation in oil is unique.

Some traders view the recent run-up in crude futures as a repeat of 1990 to 1991 when prices "spiked over $41 in the weeks leading up to the Gulf War only to implode and drop all the way down to $17.45 one month after coalition forces defeated Iraq," he said.

But others believe that the fundamentals affecting oil this time around are different.

Non-strategic petroleum reserve supplies are at 27-year lows thanks to Venezuela and the Department of Energy has estimated that the minimal operational level of non-SPR oil stocks level is 270 million barrels, Armbruster said.

Last week's U.S. inventory data pegged oil stocks at 272 million barrels, "precariously close to the 270 million mark," he pointed out.

"The problem is that the trend toward tighter inventories is likely to continue in the weeks ahead even without a war with Iraq," he said. As a result, he expects oil prices to jump to $40 or above "before this bull market runs its course."

Updates on U.S. supplies from the American Petroleum Institute and Energy Department won't be released until Thursday morning, a day late due to Monday's Martin Luther King, Jr. holiday.

Tim Evans, IFR Pegasus' senior analyst, expects the data to reveal a decline of 1 million to 3 million barrels for the week that ended Jan. 17. He also expects that gasoline inventories rose between 2 million and 3 million barrels and distillates fell by 2 million to 3 million barrels in the latest week.

Ahead of the news, petroleum-product prices closed lower. February unleaded gasoline fell by 0.17 cent to 89.93 cents a gallon. February heating oil closed at 91.19 cents a gallon, up 1.72 cents.

Natural gas surge

Expectations for a hefty drop in last week's U.S. natural-gas supplies, along with the current cold weather in much of the country, lifted prices for the heating fuel to their highest level in two years.

February natural gas tacked on 24 cents to close at $5.673 per million British thermal units. The session's high of $5.74 took out the March 2001 high of $5.71 and the next highest level is the $7.10 seen in February 2001.

Fimat's Fitzpatrick said the market estimates that natural-gas supplies fell between 175 billion cubic feet to 210 billion cubic feet during the week ended Jan. 17. IFR Pegasus' Evans expects a fall of 170 billion to 210 billion cubic feet. Both analysts pointed out that if supplies fell by as much as the market predicts, the change will be a far cry from the 126 billion fall seen a year-ago.

The Energy Department will release its weekly supply report Thursday morning.

"Once the price reaction to this report is out of the way though, prices may have a chance to reverse meaningfully to the downside, provided the weather outlook is still bearish at that juncture," Evans said.

The current strength in natural-gas prices helped most oil-service stocks move higher. The Oil Service Index ($OSX: news, chart, profile) traded up 1.9 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at 244, up 0.8 percent amid gains in natural gas and gold futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.