Oil holds strong as US fuel supplies skid lower

www.stuff.co.nz 14 March 2003

SINGAPORE: Oil prices held strong on Thursday, consolidating a US$1 gain after the US government reported a decline in fuel stocks, leaving only a thin supply cushion to cover US needs if war should break out in Iraq.

US light crude rose two cents to $37.85 a barrel, just $3.30 below a record high of $41.15 set during the 1990-91 Gulf crisis.

Latest data from the US Energy Information Administration (EIA) underpinned concerns over a possible supply crunch in the world's biggest oil consumer, as Washington remains poised to launch an invasion of Iraq, the eighth-largest crude exporter.

The EIA reported US crude inventories falling almost four 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.

"Given the reported ramping of Opec production and the continued recovery of Venezuelan production, the shortfall is shocking," SG Securities said in a note.

The Organisation of the Petroleum Exporting Countries has stepped up output this year to cover an outage of crude from Venezuela, where an anti-government strike brought production to little more than a trickle at one point.

Venezuela, normally the fifth-biggest exporter providing about 13 per cent of US oil imports, has increased shipments of crude and oil products as the two-month strike to topple President Hugo Chavez has crumbled.

Rebel oil workers pegged oil exports at 1.14 million barrels per day (bpd) in early March, still well below the 2.7 million bpd it shipped before the strike began in early December.

Crude has risen 20 per cent this year on concerns that a war in Iraq could upset oil supplies from the Middle East.

With about 300,000 US and British troops in the Gulf region, US officials said Iraqi President Saddam Hussein had "days, not weeks" to prove he had complied with UN demands for Baghdad to give up all weapons of mass destruction.

Opec, which controls 60 per cent of world crude exports, pledged earlier this week to ensure adequate supplies should war break out.

But the International Energy Agency, adviser on energy to 26 industrialised nations, said in its monthly oil market report on Wednesday that Opec's spare production capacity had been squeezed to 900,000 bpd following the recent output increases.

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

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. A further supply disruption would tax a system operating at close to capacity," the IEA said.