FUTURES MOVERS - Oil prices ease back from 12-year high - Natural gas rises; gold sinks as terror alert is lowered

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 6:12 PM ET Feb. 27, 2003

NEW YORK (CBS.MW) -- Crude futures soared toward a fresh 12-year high before easing back Thursday, as traders maintained a high degree of wariness over the latest developments regarding a possible war with Iraq.

Crude for April delivery traded as high as $39.99 a barrel, within hailing distance of the all-time high seen in the futures market -- $41.15, back in October 1990.

But traders calmed down by midday, with the April crude contract closing down 50 cents at $37.20 a barrel on the New York Mercantile Exchange.

"Once the psychological $40 barrier was not breached, this instigated traders to sell," said John Person, head financial analyst at Infinitybrokerage.com.

The market, having factored in as much negative news it could take, turned because it was "way overbought and all this market needed was a bit of good news to ... bring sellers in," he said.

Oil futures eased off their highs after U.S. officials lowered the nation's terror-alert level to "yellow" from "orange" -- reflecting the decreased threat of a terrorist attack on the nation.

Moreover, Egyptian media reported that Iraq might yet decide to destroy its al-Samoud 2 missiles, a move that would imply greater cooperation by Baghdad with U.N. weapons inspections.

Late Thursday, U.N. officials confirmed that Iraq agreed "in principle" to destroy the missiles, the Associated Press reported. Chief weapons inspector Hans Blix had given Iraq a March 1 deadline to at least begin destroying them.

Meanwhile, gold futures fell back to a more than one-week low on the back of that news. See Metals Stocks.

But several analysts said the lack of moonlight over Iraq this weekend could well raise the likelihood of an attack very soon.

Blix's scheduled testimony to the U.N. Security Council on Saturday "coincides with a new moon this weekend that provides cover for an invasion," said Peak Trading Group analyst Charles Nedoss. Also see Thom Calandra's StockWatch.

After an invasion, several issues will affect oil and gas prices.

"If prices are this high now, imagine where they may go if war drags out longer than three months," said Person.

"Supply disruptions from tankers in the Middle East may cease shipments as war develops for safety concerns," he said -- an important consideration in light of both recent declines in petroleum supplies and surging consumer demand both here and abroad.

Price scenarios

The immediate concern for traders in the event of a U.S.-led war against Iraq "will be the condition of the oil fields," said Todd Hultman, president of Dailyfutures.com.

There has been speculation that Iraqi leader Saddam Hussein plans to blow up the oil fields. Saddam denied those notions during a recent interview with CBS News. See more on this story.

If he does damage the fields, "you can expect crude prices to hit new record highs," said Hultman. But "if the oil fields stay untouched and the war progresses successfully for the U.S. in the first week, there could be heavy selling -- at least down to $28 per barrel."

Peak Trading Group analyst Michael Cavanaugh said a war "may not harm the actual supplies as much as expected, and a drastic spike followed by a downturn should be expected, with probably another upswing to follow."

Specifically, he believes the "onset of the war uncertainty and emotion would spark a huge rally" in oil. After that subsides, "traders will realize this emotional rally and profit taking will drive the market back down," said Cavanaugh. See Special Report: Countdown to War.

In the ensuing phase, he explained that the profit taking will become overdone and a new rally will set prices back above the $40 area "until the war is over and the chaos in the Middle East is brought down."

An interesting thing to note: exactly 12 years ago to the day, President Bush senior announced that the U.S. and its allies had successfully liberated Kuwait and defeated Iraq's army, the New York Times reported.

Tight supplies

Against a backdrop dominated by potential war, traders have been focusing in on oil supplies, which stand precariously at low levels.

U.S. inventories of crude stand around 271 million barrels -- near the 270 million barrels that the U.S. government sees as the minimum level at which refineries can continue to operate normally. The supplies are 16.3 percent below the year-ago level.

During the week ended Feb. 21, supplies fell by 1 million barrels, the Energy Department said Wednesday. The American Petroleum Institute reported a 3 million-barrel rise.

Meanwhile, distillate inventories fell for a sixth-straight week -- to a level not seen in nearly three years.

The Energy Department reported distillate inventories, which include heating oil, dropped by 4.5 million barrels, putting total supplies of 99.1 million barrels below the 100 million level for the first time since May 2000. They're now 25 percent below their year-ago level.

Separately, the API pegged the drawdown at 3.2 million barrels, to 103.8 million.

Gasoline inventories also declined last week, falling by 3.1 million to 208.1 million barrels and by 792,000 barrels to 209.9 million barrels, according to the respective readings by the API and the Energy Department.

On Thursday, March heating oil fell by 0.06 cent to $1.1543 a gallon, while March unleaded gasoline closed at $1.018 a gallon, down 0.03 cent.

Natural gas supplies drop

Natural gas for April delivery closed modestly higher, pressured by crude's weakness but coincidentally supported by a hefty draw in last week's U.S. supplies.

April natural gas closed at $7.485 per million British thermal units, up 9.5 cents on the session, following a dip to a $7.10 low. On Tuesday, the March contract rose as high as $10.50, moving past the previous record of $10.10 dating from December 2000.

"The rally in natural gas prices will continue given the weather forecast, which calls for more low temperatures, low storage levels and rising crude oil prices," said Economy.com energy economist Thorsten Fischer.

Early Thursday, the Energy Department reported the nation's supplies dropped by 154 billion cubic feet in the week as of Feb. 21.

Analysts at Fimat USA had been expecting a drawdown on the order of 138 billion cubic feet, while other market estimates called for bigger decreases. A year earlier, supplies fell by 73 billion cubic feet.

Supplies of natural gas are unusually tight. Total stocks of 1.014 trillion cubic feet are 948 billion cubic feet less than last year at this time and 508 billion below the five-year average, the government reported.

"Recent draws in storage, as well as continued cold temperatures, have led to upward pressures on natural gas prices," said Fischer.

High oil prices have also translated into greater demand for natural gas, he said, noting that the high oil prices drive users to switch to natural gas from petroleum-based fuels.

In the equities arena, most oil-service shares closed lower, with the Philadelphia Oil Service Index ($OSX: news, chart, profile) down 2.6 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at the 246 level, down 1 percent, on weakness in gold futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.