FUTURES MOVERS: Oil dragged to 5-week low

By Myra P. Saefong, CBS.MarketWatch.com Last Update: 4:16 PM ET March 14, 2003

NEW YORK (CBS.MW) -- Crude-oil futures fell briefly under $34 to their lowest level in nearly five weeks Friday with President Bush appearing to lean more toward diplomacy than an immediate war with Iraq.

The Bush administration has also indicated a willingness to release oil from the nation's reserves.

"Oil is going down [and] oil will keep going down until a war occurs," said Michael Cavanaugh, an analyst at Peak Trading Group in Chicago.

Most of the rise in oil prices these past months have been an emotional rally based on the fear of a war, but now that the U.N. is "taking a stand, and pushing the U.S. war effort back, the oil market is trading lower, and will continue to do so until the U.S. makes its move," he said. Cavanaugh expects oil prices to drop to the low $30s "soon."

The start of a war will likely trigger a quick rally, he said, but "once the smoke clears, the oil will drop again."

On Friday, crude for April delivery on the New York Mercantile Exchange traded as low as $33.85 a barrel, a level not seen since Feb. 11.

It recovered a bit to close at $35.38 a barrel, down 63 cents with officials from the U.S., Britain and Spain set to meet Sunday in an attempt to salvage a war resolution that authorizes military force against Iraq to disarm. See Special Report: Countdown to War.

The meeting will likely "result in a final deadline and end the suspense on the disarmament issue with Iraq," said John Person, head financial analyst at Infinity Brokerage Services. "Either Saddam will give up or America will lead an assault by next week."

Chile proposed a new plan for the U.N. Friday that sets five disarmament conditions for Iraq to meet within three weeks, but doesn't include a trigger for war. The White House immediately rejected the proposal.

Negotiations for the surrender of some Iraqi military units were under way, CNN reported Thursday -- raising the notion that even if war does surface, it could be a quick win for the forces allied against Iraq.

With the notion that the U.S. intelligence agencies have possibly brokered a deal with top Iraqi military commanders, "odds now favor a quick decisive end to a military operation in Iraq, if that is the course of action that is taken," said Person.

As the Iraq-related news continues to flow, "every comment from New York, Washington and Baghdad will be deconstructed by traders looking to see if war is imminent, as it is now pretty much of a day-to-day threat," said Michael Lynch, president of Winchester, Mass.-based Strategic Energy & Economic Research (SEER).

In other news Friday, Bush delayed the release of his "road map" for Middle East peace until a credible prime minister is installed as a balance against Palestinian leader Yasser Arafat.

Supply side comments

Also pressuring oil prices were reports that U.S. Energy Secretary Spencer Abraham was more open to releasing oil from the Strategic Petroleum Reserve (SPR).

Abraham was quoted as saying the U.S. has a "unilateral right" to use the SPR, according to Phil Flynn, a senior analyst at Alaron Trading in Chicago. His reported comments indicated that more oil could be placed back into the market soon.

Reuters also reported that the Saudis have committed to 29.5 million barrels to the U.S. Gulf for May delivery.

Still, traders realized that even with the reports that Saudi Arabia was shipping "huge super cargos of oil to the U.S. ports, that will not relieve the immediate supply concerns for another 35 days or more," said Infinity's Person. And "until the supplies are here, anything could happen including a change of heart."

In Budapest Friday, Abraham said he remains confident that OPEC members will cover potential disruption to Iraqi crude supplies.

"I have all the confidence that they (OPEC) are sincere in their commitment," Abraham said according to Dow Jones. "If a severe supply reduction occurs... we have producers who have committed to come forward and step up production."

On Tuesday, OPEC decided to leave unchanged its members' aggregate production limit, excluding Iraq, at 24.5 million barrels. But some members, particularly OPEC heavyweight Saudi Arabia, have hinted broadly at a possible output hike in the event of war. See full story.

Also this week, the Energy Department and the American Petroleum Institute both reported sizable declines in the nation's weekly crude and gasoline inventories, along with mixed data on distillate supplies.

Crude inventories are now nearly 18 percent below the year-ago level, the government report, while gasoline stocks 7 percent below its year-ago level. See full story.

Retail gasoline prices continue higher

Prices for gasoline on the retail level continued to climb Friday, despite a second session of declines for the fuel's futures price.

The April gasoline contract fell by 1.73 cents to $1.0404 a gallon in recent action on Nymex.

But at the retail level, gasoline prices averaged $1.715 a gallon, up from $1.239 a year earlier and just short of the all-time high of $1.718 seen in May 2001, according to AAA's Daily Fuel Gauge Report.

In California, average price for regular gasoline was $2.142 -- the highest in the nation.

Heating oil cool off

Also on Nymex, heating-oil futures traded lower with forecasts calling for above-normal temperatures in the eastern half of the nation. Natural-gas prices, however, etched out a modest gain.

Heating oil traded well under $1 a gallon to hit a low at 91.7 cents a gallon, the lowest since Feb. 5. It closed at 94.07 cents a gallon, down 2.64 cents.

April natural gas rose 6.8 cents to close at $5.429 per million British thermal units after an intraday low at $5.08 -- the lowest since Jan. 29. On Thursday, it dropped nearly 9 percent.

"Inventories are very tight, but the heating season is almost over, said SEER's Lynch. "This makes the weather -- which is always uncertain -- of unusual importance."

Early Thursday, the Energy Department said natural-gas supplies fell by 117 billion cubic feet during the week ended March 7. Analysts at Fimat were looking for a decline of 143 billion cubic feet.

Total stocks of 721 billion cubic feet are 1.01 trillion cubic feet below the year-ago level and 655 billion cubic feet lower than the five-year average.

The Energy Department also reported Wednesday that distillates, which include heating oil, rose by 1.8 million barrels to stand at 98.3 million barrels. Despite the gain, this was still 23.6 percent below their year-ago level.

Meanwhile, gold for April delivery climbed 60 cents to close at $336.60 an ounce after losing nearly $11 a day earlier. See Metals Stocks.

In the equities arena, oil-services companies ended the session lower, with the Philadelphia Oil Service Index ($OSX: news, chart, profile) chalking up a loss of 0.4 percent. See Energy Stocks.

And the Reuters/CRB Index -- a broad-based measure of the commodity futures market -- closed at 240, down 0.1 percent, amid weakness in energy futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.