Iraq, Venezuela remain in oil focus - Gold makes gains dollar weakness; gasoline hits $1

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 4:24 PM ET Feb. 4, 2003

NEW YORK (CBS.MW) -- Oil futures climbed Tuesday, reflecting traders' renewed concern about prospects for war in the run-up to a United Nations presentation by Secretary of State Colin Powell that could reveal proof of Iraq's defiance to disarm.

Two other factors -- news that Venezuela's production continues to climb and warnings by OPEC that the market could be in for a supply glut in the second quarter -- kept a cap on crude's price rise, however.

Traders also looked toward Wednesday morning's update on U.S. oil supplies. With analysts expecting a fall in gasoline and distillate supplies, petroleum-product futures rallied nearly 5 percent.

On the New York Mercantile Exchange, the benchmark March crude contract closed at $33.58 a barrel, up 82 cents, or 2.5 percent. It fell more than 2 percent in Monday's action.

Meanwhile, gold futures prices soared above $379 an ounce to touch their highest level in more than six years, pulled higher by Tuesday's weakness in the U.S. dollar. See Metals Stocks.

"The approach of war with Iraq still remains a significant barrier to any real reversal in prices," analysts at Fimat USA told clients.

Powell's report to the U.N. on Wednesday "could have a unifying effect on the Security Council," said Grady Garrett, chief trading strategist at EnergyTrendAlert.com.

He pointed out that "a more unified front" regarding any military action against Iraq "will go a long way toward reliving some of the global uncertainty."

Venezuelan output rising

Still, "there are some fundamental factors that should start to weigh down on crude," said Garrett.

With Venezuela's two-month-old labor strike winding down, workers in all sectors except the oil industry having been returning to work.

President Hugo Chavez claims the Latin American country's oil production has now reached 1.8 million barrels per day, up from the strike's lows of around 150,000 barrels a day and representing more than half of the country's usual daily output of 3 million barrels. Striking oil workers claim output is at more like 1.2 million barrels per day.

Looking ahead, however, Venezuela is expected to add 200,000 more barrels per day in the coming weeks, the Associated Press reported.

Reports also surfaced Monday that OPEC would more likely consider a cut in the cartel's output in the second quarter, sparked by fears of oversupply as demand slows.

Oil products rally before supply data

Futures prices for petroleum products rallied along with crude Tuesday, climbing nearly 5 percent on expectations that the latest U.S. report will reveal a decline in supplies.

March unleaded gasoline jumped to close at $1.001 a gallon, up 4.38 cents, while March heating oil tacked on by 4.38 cents to 96.19 cents a gallon.

Updates from the American Petroleum Institute and the Energy Department on U.S. petroleum supplies are due Wednesday morning.

Motor gasoline likely declined by 1 million barrels in the week ended Jan. 31, according to estimates from IFR Pegasus senior analyst Tim Evans and analysts at Fimat USA. Evans, however, said the fall could be as high as 2 million barrels.

Distillates likely fell by 4 million to 6 million barrels, Evans said. Fimat sees a smaller decline of 3 million barrels.

Both generally expect crude supplies to be up for the week.

Evans expects crude supplies compared to the prior week will range between flat and an increase of as much as 2 million barrels. Fimat forecasts a 2 million-barrel rise.

Natural gas slips back

In other energy news, March natural gas closed lower by 0.4 cent at $5.762 per million British thermal units, selling off after rising as much as 11 cents earlier in the session.

Weather forecasts call for below-normal temperatures in much of the U.S. by the end of this week, but most analysts expect this week's update on U.S. supplies to reveal a fall smaller than what's been seen in recent weeks.

Fimat estimates that natural-gas inventories fell by 192 billion cubic feet. In the past two weeks, supplies fell by 219 billion and 247 billion cubic feet.

But Fimat's estimate for Thursday's report from the Energy Department is still well above the year-ago decline of 78 billion cubic feet, and the five-year average of 120 billion.

Over in the equities arena, most oil service stocks closed higher on the back of crude's climb. The Oil Service Index ($OSX: news, chart, profile) climbed 2.7 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at 248.2, up 0.3 percent on strength in crude and gold futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.