OIL AND MONEY

March 19, 2003

Oil prices have tumbled this week, responding to the uncertainty of war. Business correspondent Paul Solman reports on the volatile oil market.

PAUL SOLMAN: Monday morning this week, Colin Powell was about to hold a press conference, Pres. Bush would address the nation at 8:00 P.M. The price of oil, highly volatile in this environment, began the day at about $35.50, a barrel. It closed in on $36 immediately, within sight of its all-time high. ABN AMRO, the huge Dutch bank, trades in the oil market for clients like oil companies and big investors. Our first question to oil analyst Jan Stuart: Mightn't this be like the last gulf war, with prices running up in anticipation of it, only to plunge once it was resolved?

JAN STUART: Back then, we had huge inventories. Prices right before the invasion of Kuwait were $16, $17. Prices before the start of this last crisis starting were already in the high $20s, low $30s. And then you started going into a war scenario.

PAUL SOLMAN: Jan Stuart is a fundamentalist in the economic, not religious, sense. That is, he predicts prices using the fundamental determinants of supply and demand -- like the fact that producers and refiners, who've been running low oil inventories for years in order to save money, have even less oil on hand right now.

JAN STUART: The single largest reason why those inventories are now so low is the political crisis in Venezuela, where in early December the national oil companies sided with the opposition to Pres. Hugo Chavez and paralyzed the Venezuelan oil industry.

PAUL SOLMAN: With far-reaching effects up here in the north as well. The U.S. Imports almost 12 million barrels of the roughly 20 million barrels we consume every day, mainly to make gasoline for transportation. Venezuela provided 15 percent of our imports, up near two million barrels a day, as much as Iraq's total daily output.

SANDY WHITLOCK: Which is why we've seen the rise in gasoline prices and also the rise in heating oil...

PAUL SOLMAN: Broker Sandy Whitlock.

SANDY WHITLOCK: ...Influenced, of course, by weather. So we had what we call the perfect storm happening and throw the war tensions in on top of that and we've had a very volatile, very pricey market.

PAUL SOLMAN: What was striking to us was just how many opinions were moving the price of oil from brokers at this desk alone.

SPOKESMAN: Hey, what's going on?

PAUL SOLMAN: That was Richard Schaffer, head of the oil desk.

SPOKESMAN: We're trading $35.95 right now. $33.60 is the current low. And you got shorts are kind of battling this SPR release headline, you know, concerns that basically saying bush can give the order any time to release from the SPR.

PAUL SOLMAN: The SPR, or "Strategic Petroleum Reserve," created in 1975 in the wake of the first Arab oil embargo. 599 million barrels of oil stockpiled by the U.S. in salt domes off the Gulf Coast, several months worth of imports. The question: If and when it might be pumped, which would dampen any price spike.

PAUL SOLMAN: The broker explains it:

AL ZAPULLA: The major problem with SPR is that it's kind of a one-shot deal, so the government has to be concerned that it's releasing it at the ideal time, because if they release it, people were saying as we approached $40, they were going to release it to kind of help bolster the economy, save the economy.

PAUL SOLMAN: Because that would drive prices down if you suddenly flooded the market with oil.

AL ZAPULA: Exactly. But now they have to worry if we're going to go in and take over Iraq, there's going to be a short-term disruption of Iraqi oil, which there already is, so people are saying you've got to keep it... I actually really have to make this call, we just came up on a dollar, I'm sorry, do you mind?

PAUL SOLMAN: No, go right ahead.

PAUL SOLMAN: Our interview may have cost the man money.

AL ZAPULA: He is the (bleep) worst.

PAUL SOLMAN: Because oil for near term delivery which had risen at the start of trades was down to now $34 a barrel, a loss of almost 6 percent within minutes -- the equivalent of a 500 or so point in the Dow.

MIKE HILEY: It's collapsing, it started up here.

PAUL SOLMAN: Which prompted another interpretation. Broker Mike HIley.

MIKE HILEY: We came in this morning thinking that the 17th was the day. At 12/:01 there would Tomahawk Cruise missiles in the air. People are continuing to take the war premium out of oil prices now.

PAUL SOLMAN: How many of a premium are buyers paying because war fears? Estimates here range from $2 to $10. Subtract $10 and you get some $25 a barrel that would be 25 cent less at the pump which is the price of oil futures.

MIKE HILEY: Here we are the current price is $34. This was Friday's price. Again it flattens out around $25.

PAUL SOLMAN: I see. So once you get out past around what year is this?

MIKE HILEY: That is 05.

PAUL SOLMAN: 2005. Basically the prediction is that the oil price is going to stay a little below $25 out into the future.

PAUL SOLMAN: Now this long-term trend fits well with the plans of yet another country heard fro:. Saudi Arabia with 12 percent of world oil production, a quarter of more of the world's reserves and the world's easiest oil to get at.

DAVID NISSEN: The best bet in the forecast in the price of oil is when you think the Saudis want the price of oil to be.

PAUL SOLMAN: Columbia University Prof. David Nissen spent decades in the oil business.

DAVID NISSEN: The Saudis aim to bring the oil market into compliance with what people typically have accepted it to be. Current policy for OPEC is 22 to $27 a barrel and bad things happen what it gets out of the range.

PAUL SOLMAN: Nissen means that the Saudis in it for the long run want to keep prices reasonable because if prices rise too high the world might spiral into recession and cut back drastically on buying oil, might drill for oil otherwise the Middle East, might even switch to alternative energy. The prices crude had swung up to $35 for which we heard almost as many reasons as there were traders on the desk.

JAN STUART: To call it an imperfect science is being way too nice. There are trend lines, directions - there are turning points, that's about as good as you are going to get.

PAUL SOLMAN: AT the end of the day, though, oil had dipped below 30 for the first time this year -- a 17 percent drop since Monday morning. It's the collective best guess of those willing to bet on the eve of war and despite fears like torched oil wells in Iraq the market seems less worried than it has been in quite a while.

ogj.pennnet.com Sam Fletcher Senior Writer

HOUSTON, Mar. 20 -- Energy futures prices continued to tumble Wednesday just hours before US-led forces attacked a "target of opportunity" among "Iraqi leadership" in Baghdad with the opening shot of a long-anticipated war.

Oil futures prices have fallen by a cumulative $7.95/bbl during the last five consecutive trading sessions on the New York Mercantile Exchange as traders stripped away the so-called "war premium" that in recent months had pushed prices an estimated $5-8/bbl above the normal market dictates of supply and demand.

Markets often "buy the rumor and sell the fact," with the occurrence of an anticipated event triggering a price drop. But traders may have moved "far too far, far too fast, and on the basis of far too little hard information" in assuming the war will be a short conflict with virtually no disruption to world oil supplies (OGJ Online, Mar. 19, 2003).

In a televised address to the nation Wednesday night, President George W. Bush cautioned that the war might be "longer and more difficult than some predict."

Burning wells US military officials reported Thursday a "small amount of wells" on fire in the southern region of Iraq. Various sources in recent weeks reported increased evidence that Saddam Hussein's forces were wiring Iraqi oil wells with explosives.

Meanwhile, evacuation of United Nations personnel prior to the attack on Baghdad apparently ended Iraqi oil exports of 1.7 million b/d under the oil-for-aid program instituted in 1991 after Desert Storm. Military action will likely knock out the additional 300,000 b/d of oil that Iraq supplies to Jordan and Syria.

However, Tyler Dann, an analyst in Banc of America Securities' Houston office, said Wednesday that US-led forces were pushing back Iraqi positions on the borders of Kuwait and Turkey "for at least a week" prior to the Baghdad attack.

Quoting "a trusted source," Dann said, "Coalition troops are experiencing more success in securing the fields in the southern no-fly zone, representing around 60% of Iraqi production." Securing fields in the north "will likely take more time," Dann said, due to Turkey's refusal to allow the US to station attack troops there.

Shortly after the attack on Baghdad, air raid warnings were sounded in Kuwait City where buildings were evacuated, and citizens were warned to don gas masks as Scud missiles from Iraq struck that city. The head of Kuwait Oil Co. previously said all of Kuwait's northern oil fields would be shut down to protect workers in case of war in Iraq. In February, Al Abdali and Al Ratqa fields were shut in because of their proximity to the Iraqi border.

Thursday, top officials from the Organization of Petroleum Exporting Countries reiterated pledges to make up any loss of oil production as a result of the war. However, analysts claimed OPEC doesn't have enough capacity to compensate for the loss of both Iraq and Kuwait production.

Other problems Former officials of Petroleos de Venezuela SA said the retirees and foreign workers brought in to replace some of the 15,000 strikers fired by the government failed to restart a catalytic cracker at the 130,000 b/d El Palito refinery in Venezuela. Government officials had said that work would be completed last week. Dissidents also reported PDVSA is now producing 2.4 million b/d of oil, while the government claims production exceeds 3 million b/d.

"The operating risk (in Venezuela) for foreign oil companies remains high, with or without President Hugo Chávez," analysts in Deutsche Bank AG's London office said earlier this week. "The ongoing governance crisis, the threat to Venezuela's already frail institutions, high political tension, cashflow pressure across corporate and government sectors, gasoline and food shortages, as well as lost oil production have placed immense strain on the domestic economy."

In the interim, Dann reported Royal Dutch/Shell Group shut in 76,000 b/d of production in Nigeria and was evacuating personnel as violence escalated prior to upcoming elections in that country. He said ChevronTexaco Corp. had not reported disruptions at its neighboring facilities, however.

Energy prices The April contract for benchmark US sweet, light crudes fell $1.79 to $29.88/bbl Wednesday on NYMEX, while the May position lost 69¢ to $29.36/bbl. Heating oil for April delivery plunged by 2.17¢ to 83.61¢/gal. Unleaded gasoline for the same month was down 1.94¢ to 94.25¢/gal.

The American Petroleum Institute reported Wednesday a 5.1 million bbl increase in US crude supplies to 272.2 million bbl during the week ended Mar. 14. The US Department of Energy, however, charted a rise of 400,000 bbl to 270.2 million bbl for the same period.

API marked an increase of 1.3 million bbl in US distillates to 101.5 million bbl, while DOE reported a loss of 1.1 million bbl to 97.2 million bbl. Both recorded a drop in US gasoline stocks; down 1.7 million bbl to 201 million bbl, according to API, while DOE reported a decline of 900,000 bbl to 201.1 million bbl.

"Even with the material divergence between DOE and API weekly crude and distillate inventory changes, crude inventories remain tight and product inventories continue to tighten," analysts said Wednesday at UBS Warburg LLC, New York.

Record low gas storage The April natural gas contract dipped by 6.1¢ to $5.28/Mcf Wednesday on NYMEX, following the crude oil market lower "despite a firmer physical market and concerns about low inventories," analysts at Enerfax Daily reported Thursday.

The US Energy Information Administration said Thursday that 84 bcf of natural gas was withdrawn from US underground storage last week, compared with withdrawals of 117 bcf the previous week and 92 bcf during the same period last year.

US gas storage now stands at a record low of 636 bcf, down 1 tcf from a year ago and 1.28 tcf below the 5-year average.

In London, the May contract for North Sea Brent oil lost 50¢ to $26.75/bbl Wednesday on the International Petroleum Exchange. The April natural gas contract inched up 0.3¢ to the equivalent of $2.784/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 57¢ to $27.12/bbl Wednesday.

Contact Sam Fletcher at samf@ogjonline.com

sg.biz.yahoo.com Friday March 21, 3:49 AM (This updates a story that ran at 1712 GMT with DAX closing price) By Maria Daly Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--European stocks ended mostly lower in thin volume Thursday as investors reacted with caution to news that the war in Iraq had begun.

At the close, London's FTSE-100 Share Index was up 0.01% at 3765.7, while Paris's CAC-40 Index fell 1.5% to 2794.83. At 1657 GMT Frankfurt's Xetra Dax Index closed 0.4% lower at 2604.85.

David Buik at Cantor Index said market volume was negligible on the first day of war in comparison with previous sessions, as the market remained preoccupied with watching battle progress in the Gulf.

U.S. President George Bush's statement Wednesday evening that war may be drawn out also caused investors to be sidelined. Traders commented that hopes for short conflict gave way to fears of a protracted campaign.

Economist Neil Parker at Royal Bank of Scotland said market sentiment is likely to continue being fueled by the drip-feed of news on Iraq as traders look for evidence of a quick U.S. victory.

He added that concern over use of chemical weapons is likely to unsettle sentiment and as troops move closer to Basra and Baghdad there is likely to be a heightened sense of unease. "In the current environment, investors are loathe to increase their exposure to risk," he said.

The assumption of a short successful war with Iraq is now being tested, said strategists at ABN Amro.

Morgan Stanley Chief Global Economist Stephen Roach warned that investors shouldn't conclude that U.S. military supremacy will lead to the perfect victory in Iraq.

"Courtesy of global terrorism, the proliferation of weapons of mass destruction, and the breakdown of once steadfast alliances, today's world is a far more unstable and much scarier place than it was in the aftermath of the Gulf War of 1991," he said in a note published Thursday.

Russian President Vladimir Putin Thursday demanded a quick end to the U.S.-led attack on Iraq, saying it was in no way justified and calling it a "big political mistake."

Analysts also warned that even if it is a short sharp war, any resultant "victory rally" may stall on the less- than-sparkling prospects for global economic recovery.

Friday's session is likely to remain closely tied to reports of military progress from the war zone, but markets may also experience volatility due to the expiration of derivative contracts across the region.

Most European markets will experience "double witching," which occurs when the contracts for stocks index futures and stock index options expire on the same day. Traders expect Friday's expiration of derivatives contracts to be extremely volatile.

"Tomorrow's trade could be dramatic to say the least, but in the meantime sentiment remains undecided," commented one London trader.

Oil stocks were higher in late trade after unconfirmed reports that two Iraq oil fields were on fire. However, gains were tempered as both Saudi Arabia and Venezuela have pledged to keep the oil flowing during wartime. BP ended up 0.7% at 417.25 pence in London.

Insurance stocks - one of the strongest performing sectors in recent sessions - reversed course Thursday.

Europe's largest insurer, Allianz, said it would raise at least EUR5 billion in a bumper rights issue and bond sale. Shares fell 8.9% to EUR59 in late trade, leading decliners in Frankfurt.

The rights issue, the biggest ever in Germany and the largest one to be underwritten, will boost the number of outstanding Allianz shares by as much as 50% from the current 243 million.

Separately, Munich Re, the world's largest reinsurer, said it and Allianz will reduce their reciprocal shareholdings to around 15%. Munich Re also said it intends shortly to strengthen its capital base through the issue of subordinated bonds. Shares fell 6.7% to EUR76.59.

French insurer Axa came under pressure after credit ratings agency Moody's downgraded the company's senior debt rating, warning that volatile stock markets could continue to affect profitability. Shares fell 4.8% to EUR11.7, leading decliners in Paris.

Other notable decliners included Sage Group, the U.K.'s largest maker of accounting software. Shares fell 12.1%, to 123 pence after UBS Warburg cut its rating on the company to reduce from neutral.

At 1657 GMT, the Dow Jones Stoxx Index of shares in European companies was trading down 0.6% at 178.22, while the Dow Jones Euro Stoxx Index, which tracks companies in countries that joined the single currency, fell 1.3% to 170.20.

The Dow Jones Euro Stoxx 50 Index was down 1.6% at 2152.7 and the Dow Jones Stoxx 50 Index was down 0.6% at 2223.9.

-By Maria Daly, Dow Jones Newswires; +44-20-7842-9308; maria.daly@dowjones.com

sg.biz.yahoo.com Friday March 21, 3:47 AM By Masood Farivar OF DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--U.S. crude oil prices tumbled again Thursday afternoon, as Baghdad came under new bombardment and U.S. Marines crossed into Iraq.

The developments rekindled speculation the conflict will be short lived, leaving the world flooded in oil pumped to head off a supply disruption that many traders now think won't be very significant.

Oil prices had rallied earlier in New York and London on reports that some oil wells in southern Iraq were on fire, raising concerns about long-term damage to Iraq's production capabilities. But the scale of the bombardment that followed reinforced a persistent belief that the war will be a quick one and "usher in an era of new low oil prices," said Phil Flynn, an analyst at Alaron Trading Corp.

May light, sweet crude futures at the New York Mercantile Exchange fell as much as $1.61 to a low of $27.75 a barrel. Less-active April futures, which expire Thursday, were down as much as $1.88 at $28.00 a barrel, a three-month low for a contract closest to expiration.

"The harder we bomb, the more we come off," a floor trader said of the selloff.

Nymex crude oil futures, after soaring to nearly $40.00 a barrel ahead of the war, have fallen 26% in the past six trading days as a U.S. attack began to appear inevitable.

OIL UPDATE -2: Supply Disruptions Minimal, Glut Feared

The price decline has come as officials in both producing and consuming countries reassured the market that they won't allow supply shortages to develop. The Organization of Petroleum Exporting Countries said it would make up for any shortfall resulting from the war.

In a statement issued shortly after news of the military strikes Wednesday night, OPEC President Abdullah Bin Hamad Al-Attiyah said he had consulted with OPEC members who have "pledged to use, in the interim, their available excess capacities to ensure continued supply."

In a departure from the events of the Persian Gulf War in 1991, neither the International Energy Agency, the Paris-based energy watchdog for the West, nor the U.S. has ordered the release of crude oil from their strategic reserves, saying supply disruptions haven't been sufficient to warrant the step.

U.S. Energy Secretary Spencer Abraham said Thursday that the U.S. and others in the IEA will release some of their 1.2 billion barrels of crude oil reserves "if needed" during the Iraq war.

But he also pointed to recent efforts by oil-producing countries to increase supply, in particular a sharp increase in Saudi oil output in recent weeks.

Analysts said those comments helped assuage fears that a war in Iraq - which produces 3% of the world's oil - could create severe supply shortages.

Iraq's 1.7 million barrels a day of oil exports have essentially come to a halt. But initial reports from the U.S. Navy have indicated no signs of disruption to shipping lanes in the Persian Gulf, including the crucial Strait of Hormuz. Tankers continued loading crude Wednesday at Kuwait ports, just a few dozen miles south of Iraq.

Global supplies are such that the White House dismissed concerns about reports that a handful of oil wells in southern Iraq were on fire.

"World energy supplies are more than adequate to compensate for any disruption these acts may cause," White House spokesman Ari Fleischer said, reiterating that the U.S. saw no need to tap its Strategic Petroleum Reserve. "Saudi Arabia and other major energy suppliers have increased production and their exports are proceeding normally in this regard."

Glut Feared

U.S. oil inventories are near 30-year lows and producers are nearing the limits of their capacity, so there is little margin for error in the event supplies in the oil-rich Persian Gulf region are substantially disrupted.

But with OPEC pumping at unusually high levels, Venezuelan output returning to more normal levels and a colder than normal winter largely over, traders are now factoring in the prospect of a glut in the market.

"Assuming that everything goes well, the fundamentals look fairly bearish," said Aaron Brady, an analyst at Energy Security Analysis Inc. in Wakefield, Mass. "OPEC is pumping at a high rate, Venezuela is back, and even if Iraqi oil is cut off for some period of time, it is manageable."

A glut-induced drop in oil prices would be welcome news for the U.S. economy, which has been struggling to mount a recovery while burdened with high energy costs, and U.S. consumers, who are paying record prices for gasoline.

But it terrifies OPEC members, who have already begun to talk about the need to cut output to head off a plunge in prices.

"If prices go through the floor, we will decide about cutting production in the same way that we put oil in the market when prices go through the roof," OPEC Secretary-General Alvero Silva said.

Through unusually high levels of coordination, OPEC members have managed to support prices at relatively high levels for more than three years. But some traders see trouble ahead for the group's winning streak.

Iraq will badly need to boost revenues to rebuild, leading some to speculate that the country, a founding member of OPEC, may want to leave the group to escape its quota restrictions. That could weaken OPEC's resolve to tighten global supplies, analysts said.

"There is a a perception that a regime change in Iraq will dramatically change the world oil balance of power," Flynn said.

-By Masood Farivar, Dow Jones Newswires; 201-938-2094; masood.farivar@downones.com

www.vheadline.com Posted: Thursday, March 20, 2003 By: Patrick J. O'Donoghue

Venezuelan Ambassador Jorge Rondon left Iraq Monday evening on instructions from the Venezuelan Foreign Ministry and will remain in diplomatic service in Jordan.

Political Sciences professor and anti-government columnis, Anibal Romero claims that the attack on Iraq will affect Venezuela. Firstly, Romero contends, the USA will be seeking out outbreaks of terrorism and divert money from development projects to intelligence gathering and military objectives.

After the war oil prices will probably drop as Iraqi oil flows on to the market … “Venezuela will lose markets as other countries turn to Iraq for supplies … very ironic for Venezuela ... Chavez Frias will not to antagonize the USA since he finds himself in a weak position.”

Romero has harsh words for the French and their attitude towards the war ... “the French imperialists received Zimbabwe’s Mugabe, do business with Chavez Frias and other third world dictators … they are the principle investors in the Iraqi oil industry.”