Oil Rises As U.S. Supplies Dwindle, War Looms

www.morningstar.ca 12 Mar 03(2:20 PM) | E-mail Article to a Friend

NEW YORK (Reuters) - Oil prices jumped nearly a dollar on Wednesday as the U.S. government reported a fresh fall in fuel stocks, leaving little supply cover for looming war in Iraq.

U.S. April light crude futures climbed 98 cents to $37.70 a barrel, below its recent peak of $39.99. Oil prices set a record high of $41.15 a barrel during the 1990-91 Gulf crisis.

In London, benchmark Brent futures rose 51 cents to $33.80 a barrel.

The Department of Energy said U.S. crude inventories fell nearly 4 million barrels to 269.8 million, below the government's suggested level for smooth operations and matching a 27-year record low hit in early February.

"It shows the U.S. market is still under-supplied by about 1 million barrels per day on an average basis," said Lawrence Eagles of GNI-Man Financial.

Oil prices are up 20 percent this year on concerns that a war in Iraq could upset oil supplies from the Middle East.

With more than 250,000 U.S. and British troops ready for war, U.S. officials said Saddam had "days, not weeks" to prove he had complied with U.N. orders and given up all weapons of mass destruction.

Prices eased briefly on Tuesday after the Organization of the Petroleum Exporting Countries, which controls around 60 percent of world crude exports, pledged in Vienna to ensure adequate supplies for nervous oil markets.

Saudi Arabia has raised production sharply since the start of the year to make up for supplies lost from Venezuela during a two month workers' strike.

But the International Energy Agency, adviser on energy to 26 industrialized nations, said on Wednesday OPEC's spare oil production capacity had been squeezed to just 900,000 bpd following the recent production increases.

"This is less than the potential loss of supply in the event of war in Iraq," said the Paris-based IEA in its monthly Oil Market Report.

Iraqi output, running at 1.7 million bpd over the past month, would be expected to be halted in the event of war. In addition, Kuwait has said it might need to suspend as much as 700,000 bpd as a precaution.

"The market is heading into a period of heightened uncertainty with low stocks and limited spare production and shipping capacity," the IEA said.

U.S. gasoline supplies were also sharply lower last week according to the stock reports.

U.S retail gasoline prices are already within two cents of all-time highs. U.S. Energy Secretary Spencer Abraham has said Washington will only tap its 600 million barrels of emergency oil reserves as a last resort in the event of a severe supply disruption.