Oil prices surge

www.news.com.au February 27, 2003

OIL prices have surged to their highest level since the Gulf War and could easily surpass $US40.00 a barrel, analysts have said. "Crude stocks are low and when you get problems in a major producing region such as Venezuela and potential problems in the (Persian) Gulf, another huge producing region, there is only one way prices can go," Commonwealth Bank of Australia chief commodity strategist David Thurtell said.

Overnight oil prices hit a new post Gulf War high of $US37.90 ($62.63) a barrel, up $US1.84 and within reach of the record $41.15 hit in October 1990.

London Brent crude gained 76 cents to $33.08 a barrel.

Driving prices higher was a United States government report revealing a big drop in winter heating fuel stocks as the Bush administration continues to prepare for a possible war against Iraq.

As parts of the US endure a colder-than-normal winter, supplies of heating oil in the week to February 21 fell 3.9 million barrels to 36.1 million barrels, a 33 per cent deficit from a year ago.

The crisis in Venezuela, a major supplier to the US market, has also placed pressure on US inventories.

"It has been a fairly cold winter in the US and that has led to a big demand for heating oil," Mr Thurtell said.

"The problem with that is a big source of supply to the US has been Venezuela and there has been a strike in Venezuela."

Mr Thurtell said that on top these "real" elements impacting oil prices, the market had factored in the possibility of war against Iraq.

"Potentially there is a huge disruption of shipping in the Gulf.

"That is the fear factor and you have those real factors."

Despite expectations that oil prices will strengthen in the short term, shares in leading Australian oil and gas producers Woodside Petroleum Ltd and Santos have reacted indifferently.

At 1503 AEDT, Santos was one cent firmer at $5.83 while Woodside had slumped 22 cents to $10.64.

"It (Woodside) may have something to with their looming production gap but it is hard to know (why the stock has fallen so sharply)," Deutsche Bank energy analyst John Hirjee said.

"It is clear that most investors are thinking on the line that you sell oil equities when the oil prices are high rather than buy, but nonetheless you would expect some response to the underlying commodity given it does have a significant influence on profits."

Woodside still seems to be suffering from negative sentiment after last week reporting a $92 million full-year loss a writing down exploration expenditure and its investment in Oil Search Ltd.

Underlying earnings dipped almost 11 per cent.

Woodside also foreshadowed lower-than-expected production in 2003.