Oil Prices Shoot to a 12-Year High

reuters.com Thu February 27, 2003 04:22 AM ET By Tanya Pang

SINGAPORE (Reuters) - Oil prices shot to a 12-year high Thursday as a severe bout of winter weather in the United States drained fuel stocks, leaving energy consumers dangerously exposed ahead of possible war in Iraq.

U.S. light crude in electronic trade hit $38.66 a barrel, the highest oil price since the 1990-1991 Gulf crisis when crude peaked at over $41 shortly after Iraq's invasion of Kuwait.

London Brent LCOc1 opened up 63 cents at $33.70 a barrel, a two-year high, and U.S. heating oil futures HOc1 bolted to $1.18 a gallon, matching this week's all-time highs.

"There remains a war premium of some $2 to $6 on any given day, but there is tightness in fundamentals at the moment and oil prices would certainly be higher than normal, even without Iraq in the picture," said Paul Ashby, analyst at ABN Amro in Sydney.

The U.S. government's Energy Information Administration (EIA), said Wednesday that the nation's distillate stocks, including winter heating oil, fell 4.5 million barrels in the week to February 21.

U.S. winter demand for distillates in the last four weeks has been more than 20 percent above last year and stocks are 33 percent below year-ago levels, the EIA said.

The fall in inventories has been driven by abnormally low temperatures in the U.S. Northeast, the world's biggest heating oil market, and by lower imports from Venezuela, where oil exports have been hit by a strike now in its 12th week.

Forecasts predict colder-than-normal temperatures continuing in the Northeast through to next week.

Record natural gas prices mean factories are expected to generate additional pressure on oil stocks as they switch to using distillates for fuel.

The EIA also reported a one-million-barrel fall in crude stocks to 272 million barrels, leaving inventories at their lowest since 1975, just above the 270-million mark considered a minimum to keep U.S. refineries in operation.

SATURDAY DEADLINE FOR IRAQ

U.S. Energy Secretary Spencer Abraham said earlier this week that Washington was ready to release crude from the 600-million-barrel national reserve if it judged a war in Iraq was causing severe supply disruption.

Iraq exports roughly two million barrels per day (bpd) of crude, making it the eighth-biggest exporter, but oil markets fear war would disrupt supply from other Middle East producers, which account for about 40 percent of globally traded crude.

U.S. officials said Wednesday that Saudi Arabia, the world's biggest exporter, had agreed to increase crude production by 1.5 million bpd if Iraqi exports were interrupted by war. The kingdom is already supplying extra crude to U.S. refiners to make up for the loss of Venezuela's exports.

With Iraq facing a U.N deadline Saturday to begin destroying its al-Samoud 2 missiles, chief U.N weapons inspector Hans Blix said Wednesday that Baghdad was still not fully cooperating on disarmament despite the recent handover of new documents.

Blix is preparing a written report to the U.N. Security Council assessing progress in the search for Iraq's alleged biological, chemical and nuclear weapons. Iraq denies it possess such arms.

President Bush continued to press his case for an invasion of Iraq, saying an end to Iraq's government would create an opportunity for peace in the Middle East.

He also said the United States would protect Iraq's oil from sabotage by the country's "dying regime." Iraqi President Saddam Hussein has accused the United States of pursuing war to gain control of his country's oil, a charge denied by Washington.