cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 7:11 AM ET March 21, 2003

NEW YORK (CBS.MW) -- Brent crude futures sagged again in London trading Friday, as traders looked beyond fresh reports of oil wells set afire in southern Iraq and concentrated instead on the course of the military campaign against Saddam Hussein.

Brent for May delivery dropped back below the $25 level before recovering somewhat, trading lately at $25.20 a barrel, off 30 cents, on London's International Petroleum Exchange. Brent crude closed down $1.25 a barrel on Thursday.

Meanwhile, spot gold gave up early gains, skidding 10 cents to $332.30 an ounce. On Thursday, gold futures closed at a three-month low. See Metals Stocks.

Brent's price weakness points to a further retreat in the benchmark crude contract when trading opens later on the New York Mercantile Exchange.

Expectations that the U.S. and allied war against Iraq will be quick with little disruption eventually won the favor of most oil traders on Thursday, prompting crude futures to fall for a sixth-straight session back to mid-December levels.

"The feeling is apparently very widespread that the conflict will be resolved quickly and oil will flow freely into the marketplace," Michael Fitzpatrick, an analyst at Fimat USA, told clients Thursday.

During the session, developments in the war took crude prices on a roller coaster ride, with nearly $3 separating the price from its low and its peak.

As many as four oil fires are burning in southern Iraq, U.S. defense officials said Wednesday.

During a press conference, White House spokesman Ari Fleischer said allied forced were confirming the fires at a "small number" of wells, but had no information as to the extent of the damage. See Special Report: America at War.

The news provided oil with a temporary lift, but that soon faded when the number of oil fires was actually smaller than many had anticipated.

"This is really a good sign," said energy analyst Peter Zeihan of Stratfor, an intelligence-consulting group based in Austin, Texas, explaining that the oil market was expecting many more wells to be set on fire, even at the start. Listen to Zeihan's outlook.

He now believes that the wells mentioned in the news are part of the Rumaila oil fields, Iraq's second-largest producing field geographically behind Kirkuk in the north. Rumaila accounts for about half of Iraq's production of around 2.4 million to 2.5 million barrels per day.

There were reports that several hundred of the more than 500 wells in Rumaila were wired together with explosives by the Iraqis and that there was a single switch that would trigger a fire in all of them, he explained.

The news that only a few wells were set on fire indicates that there is no single switch, he said.

In Thursday's Nymex action, April crude closed at $28.61 a barrel, down $1.27, to sit at its lowest close since Dec. 13, 2002. The contract, on the decline since March 13, has lost $9.22 in the last six sessions -- nearly a 25 percent pullback.

Crude for May delivery, which became the front-month contract at the close of the session, fell by $1.24 to $28.12 a barrel.

"The removal of uncertainty has led to a reduction in the [oil] risk premium by as much as one half" -- but not a single shot needed to be fired for this to happen, said Thorsten Fischer, an oil economist at Economy.com.

"It was enough that the market was convinced that the waiting was going to be over soon," he said. "That is why the actual start of the campaign did not make that big of a difference."

Oil prices have dropped dramatically since the U.S. made its decision to forcibly disarm Iraq, with investors expecting the war "to go well for the U.S., Iraqi oil fields to be preserved and a safer, friendlier oil trade to emerge as a result," said Todd Hultman, president of Dailyfutures.com.

Most oil traders are "acting as if the outcome of the war is in the bag, but clearly it is not -- at least not yet," he said.

What next

Right now, the biggest concern for oil traders will be the condition of the oil fields in Iraq and Kuwait and the flow of oil tankers in the Persian Gulf," said Hultman.

Economy.com's Fischer emphasized that "everything depends on how the campaign proceeds."

Crude prices will continue to fall as long as the war goes according to plan -- "as long as there is no bad news" which could come in the form of an escalation of the conflict either because Saddam attacks Israel or uses biological and chemical weapons, he said.

The war situation would also worsen if Saddam succeeded in destroying oil fields in neighboring countries, Fischer said. "Any of these developments would cause crude prices to reverse course, but most likely only temporarily," he said.

If things went terribly wrong and prices shot up again, the Bush administration would release crude from the Strategic Petroleum Reserve, "dampening further price hikes," he said.

Michael Lynch, president of Strategic Energy & Economic Research (SEER) in Winchester, Mass., pointed out that a release from the Strategic Petroleum Reserve can be "considered 'in the pipeline' right away" because the markets know the details of the amounts, location and delivery of the oil.

Supplies reassured

For now, oil traders need "deep pockets to survive, because there are going to be sharp swings up and down in the next week or two," said SEER's Lynch. "Any given position could be hammered," he said, so "expect margin calls."

There's no sure way of making money, but traders "may try to benefit from the increased volatility, while more conservative people may just want to hedge the price of energy they'll have to pay for their business," Fischer said.

With concerns over supplies growing, OPEC and the International Energy Agency reassured the oil market that producers are committed to maintain oil supplies in the event of war-related disruptions.

In a statement from Paris, Claude Mandil, the IEA's executive director, said: "With the initiation of military operations in Iraq we are monitoring developments as they relate to the supply of oil to world markets ... We are determined to promote stability in world oil markets and remain ready to reinforce producers' efforts should the need arise."

OPEC said on Thursday it would make up for any oil shortages from the attack on Iraq, using spare output capacity to ensure continued supply, Reuters reported.

OPEC President Abdullah al-Attiyah of Qatar said he had spoken with all 11 members of the oil cartel following the attack.

Against this backdrop, the Energy Department and American Petroleum Institute both reported Wednesday a rise in crude inventories and a drop in gasoline supplies, but data for distillates were mixed.

Crude inventories, as of the week ended March 14, stand nearly 18 percent below the year-ago level, and distillate and gasoline stocks are 23.5 percent or 7 percent below their year-ago levels, respectively, according to the two reports. See the full story.

Retail gasoline prices slip

Prices for gas at the pump were slightly lower for a second-straight day on average for the nation Thursday, according to AAA's Daily Fuel Gauge Report.

The average price at the pump totaled $1.714 a gallon as of early Thursday, compared with $1.719 on Wednesday. A year ago, prices stood at $1.298 a gallon. The price touched a fresh all-time high Tuesday at $1.722.

Retail prices in California were the highest in the nation, averaging $2.176 a gallon, unchanged from the day before, the AAA's report said.

"Gasoline prices may well reach new record highs if stronger demand coincides with still high prices," said Economy.com's Fischer. They will certainly reach record highs if one of the more pessimistic scenarios plays out in the Gulf and crude prices rise again," he said.

Futures prices appeared to be unfazed by an unconfirmed report that terrorists are mulling an attack on key U.S. refineries in the Caribbean.

The Oil Price Information Service, a provider of gasoline commentary, said the U.S. believes terrorists could be planning an attack on a 495,000 barrel-per-day refinery in the Virgin Islands operated by Amerada Hess (AHC: news, chart, profile) and a 250,000 barrel-per-day facility in Aruba run by El Paso (EP: news, chart, profile).

The report is an exclusive to OPIS and its newsletter Oil Express. A call to Amerada Hess seeking comment wasn't returned. An El Paso spokesperson said "all of our facilities are operating at a high state of alert. We employ a multitude of security measures and [are] continually updating and enhancing them and do not discuss specific security measures."

In the futures market, April gasoline prices closed at 90.96 cents a gallon, down 3.29 cents on the session.

Also on Nymex, April heating oil fell by 1.17 cents to 82.44 cents a gallon.

"Refined products will follow crude prices, but strong seasonal demand for gasoline will support gasoline, whereas demand for distillates will continue to fall," said Fischer.

Natural gas climbs

April natural gas climbed by 2.8 cents to close at $5.306 per million British thermal units after a weekly update on U.S. supplies revealed a decline within market expectations.

The Energy Department said natural-gas inventories fell by 85 billion cubic feet during the week ended March 14.

Total inventories of 636 billion cubic feet are now 1 trillion cubic feet less than the level of a year ago and 646 billion cubic feet below the five-year average.

Total stocks are at "a new all-time spring low," said IFR Pegasus senior analyst Tim Evans. But "mixed weather and fickle petroleum may continue to hamper uptrend development."

Fimat expected U.S. gas in storage to have been drawn down by 88 billion cubic feet last week.

In the equities arena on Thursday, the Philadelphia Oil Service Index ($OSX: news, chart, profile) traded higher. See Energy Stocks.

And the Reuters/CRB Index -- a broad-based measure of the commodity futures market -- closed at 234.2, down 0.4 percent amid weakness in gold and energy futures markets.

Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

www.nola.com By H. JOSEF HEBERT The Associated Press 3/19/03 6:21 PM

WASHINGTON (AP) -- Global oil production has been on a rebound for weeks, but so far little of it has reached U.S. shores, according to the Energy Department.

The department's statistical agency said Wednesday that U.S. crude oil stocks remain at an uncomfortable 270 million barrels, a level the industry considers a minimum for smooth refinery operation. That's about the same as stocks have been since early January.

At the same time, oil producers, led by Saudi Arabia, have been ramping up the amount of oil they're taking from the ground. Analysts said the oil is either in storage or on tankers already on the high seas.

That, together with an expectation that war with Iraq might be brief and avoid major damage to oil fields, has caused oil prices to tumble this week. The price of crude dropped again Wednesday to $31.05 a barrel on the New York Mercantile Exchange, a decline of nearly $7 from a week ago when it reached a 12-year high of $37.83 a barrel.

Oil traders "are beginning ... to realize there's a bit of a glut of oil around," said Leo Drollas, chief economist of the London-based Center for Global Energy Studies.

Much of that oil is now in storage in the Persian Gulf or in tankers on the high seas, said oil analysts. Saudi Arabia is believed to have as much as 50 million barrels in storage in the country and more en route to other storage facilities. That's enough to replace Iraq's 1.5 million to 2 million barrels a day for about a month.

But that oil has yet to reach the U.S. markets.

Crude inventories have consistently been 300,000 to 400,000 barrels below a year ago, said Doug MacIntyre, an oil analyst for the Energy Information Administration, the DOE's statistical arm. Imports also have been down from previous levels, although OPEC producers other than Iraq and strife-torn Venezuela have been pumping more oil for weeks.

The low U.S. inventories reflect transportation delays, but also reluctance by refiners to buy oil when the price has been $35 to $37 a barrel, analysts said.

Larry Goldstein, president of the private Petroleum Industry Research Foundation, said he anticipates that U.S. oil stocks will begin to grow in the coming weeks, adding to a calming of the markets -- as long as a war in Iraq does not become messy and threaten Persian Gulf supplies.

"If we can contain whatever negative consequences (from a war) to Iraq, then the Saudis ... have enough flexibility to take care of the loss of Iraqi oil," said Goldstein.

He said the markets also have been calmed by "a more visible policy" from the Bush administration in recent days on use of the government's Strategic Petroleum Reserve. They have made clear they're ready to use some of the 600 million barrels in the government reserve independent of action by other major oil consuming nations, he said.

Still, there remains some trepidation among oil traders and analysts should war in Iraq last a while. Crude oil prices are likely to remain volatile in the months to come, they cautioned.

"This thing could go right back up," said Tom Bentz, an analyst at BNP Paribas in New York, suggesting prices could rebound once fighting erupts. "We're still vulnerable because inventories are tight."

The biggest fear in the market is that oil facilities in other Middle Eastern countries, such as Kuwait or Saudi Arabia, could be attacked -- a scenario that would cause oil prices to shoot higher very quickly, said Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York.

www.accessatlanta.com By MICHAEL E. KANELL The Atlanta Journal-Constitution

With war looming, oil prices have dropped but supplies are perilously tight -- raising chances of a shortage just as American drivers rev up for spring and summer.

Despite a slight increase last week, crude oil inventories are 18 percent below their levels of a year ago -- just barely above the amount needed for daily use, the Energy Information Administration said Wednesday.

Yet after President Bush on Monday announced plans to attack Iraq, oil prices fell -- a clear sign that traders expect no disruption in supplies, no spread of war to surrounding countries. Moreover, nearby Saudi Arabia has pledged to make up for any shortfalls.

But measly oil stocks in reserve mean that America is skirting close to a shortage, according to energy experts.

"These are the lowest stocks I've seen since 1993," said Jay Hakes, former Energy Information Administration chief. "I think there's more risk at this point that prices go back up. Besides, prices are still very high. The data suggests that we are not out of the woods yet."

The United States has been depleting its reserves by consuming 1 million barrels per day more than it produces and imports, said James Williams, president of WTRG Economics.

"We continue to run on empty," Williams said.

The Bush administration has promised to tap some of the Strategic Petroleum Reserve if there is a shortage, a move that can add several million barrels a day.

There is something of an energy window, since the winter need for heating oil has softened and the vacation season is still some time off. Energy prices have been adding a roughly $60 billion-a-year tax on consumers and companies. That load grew heavier in recent weeks as oil burgeoned to nearly $40 a barrel -- almost twice the price of a year ago.

The higher the price of oil, the greater the danger to the economy. Much of America's driving -- work, school, shopping -- will be done regardless of price, and money for gas is siphoned from other things.

In 1991, the start of the Gulf War took the air out of oil prices, proving the doomsayers wrong. But this time, more supplies are threatened -- not just in Iraq. Political turmoil has kept both Venezuela and Nigeria from full production.

"That would be a lot for the Saudis and the SPR to handle," said Hakes, now director of the Carter Presidential Library in Atlanta. "But it's doable."

The economy started a slide in 2000 that became a recession early in 2001. While growth began later that year, recovery has been sluggish at best. More than 300,000 jobs were shed last month, yet the economy still has pockets of strength.

Housing has provided unprecedented power to the limping economy for two years. And refinancing -- fueled by 40-year lows in interest rates -- again hit record highs last month, the Mortgage Bankers Association said Wednesday. But purchases have leveled off.

"Despite the heated pace of refinancing, housing's positive impact on the broader economy is waning," said economist Celia Chen of Economy.com

Construction of new homes last month took its sharpest tumble in almost a decade. After a buying binge for much of 2002, supplies of unsold homes have climbed back to year-ago levels.

"A year ago, it looked like every place was doing fine, but we are starting to see some soft spots," said economist Michael Carliner of the National Association of Homebuilders. "Atlanta is one of the markets where people have to be more cautious about speculative building."

With business investment still anemic, consumers have carried the economy, but they have become increasingly fretful. Last month consumer spending faltered also, and consumer comfort last week took yet another dip, to again reach a nine-year low, according to the ABC/Money Market survey.

About 52 percent of Americans say the economy is deteriorating -- 64 percent of women, but 39 percent of men.

Yet that cocktail of indicators is an undependable guide, said Rajeev Dhawan, director of the forecasting Center at Georgia State.

"Those trends cannot be projected until the future until we know how the war turns out," said Rajeev Dhawan, director of the Forecasting Center at Georgia State. "Everything depends on how the war turns out."

The stock market, considered a leading indicator, has embraced the arrival of war as the end to uncertainty.

But Wall Street in 1991 also boomed when the bombing started -- but the economic bounce was brief. For more than a year, economic growth was shaky and unemployment kept rising.

Now, the economy will come out of the war already damaged by months of high oil prices and unexpectedly cold weather, said John Silvia, chief U.S. economist for Wachovia Securities. Pessimists have said the war will send the economy dipping back into recession. Silvia is only a bit more hopeful.

"The economy still avoids a double dip but just barely," he said.

And that is assuming the battle goes according to administration plans.

www.forbes.com Reuters, 03.19.03, 3:46 PM ET By Richard Valdmanis

NEW YORK (Reuters) - The dramatic slide in oil prices in recent days, triggered by expectations of a swift U.S. military victory in Iraq, may be short-lived as domestic fuel stockpiles remain thin, the U.S. Department of Energy said Wednesday.

U.S. oil prices have fallen 20 percent in the past week to under $30 a barrel, mirroring the drop in prices at the onset of the first Gulf War more than a decade ago. But the current slide appears less justified due to extremely tight supplies ahead of peak driving season in the U.S., the government said.

"Of course, the major difference is the level of inventories," the Energy Information Administration, the DOE's statistical wing, said in a report.

At the start the Gulf War in 1991, U.S. oil stocks were "28 million barrels above what was thought to be the minimum operating inventory level (OIL), unlike today, when they are barely above the lower OIL," the EIA said.

While demand for fuels like gasoline and diesel tends to fall in the spring, demand for crude oil remains high as refineries increase their run rates to build up fuel stocks for the seasonally higher demand in summer -- calling for increases in U.S. imports of crude.

U.S. oil inventories rose 400,000 barrels to 270.2 million barrels, just above the minimum inventory level of 270 million barrels suggested for smooth operations, in the week ended March 14, the EIA said in a weekly report.

The small increase in supplies was due to a rise in import levels from Canada, Nigeria and Iraq. Oil dealers have also been anticipating higher import levels from Saudi Arabia, which has increased production sharply this year, and Venezuela, which is recovering from a two-month oil workers' strike.

OPEC President Abdullah al-Attiyah has told the International Energy Agency that the oil producer group stands ready to cover any supply shortfall due to the imminent war on fellow member Iraq.

But concerns remain whether the modest increase in oil imports will be enough to satisfy rising refinery demand as U.S. oil suppliers struggle to beef up pre-summer fuel supplies.

"This year the inventory build will need to be greater than normal as oil inventories are very low across the board," the EIA said in its report. "Inventories now are not as well stocked as they were in January 1991, by any measure, meaning a greater dependence on imported oil to meet demand."

The EIA said that the tight supply situation could support prices near $30 per barrel and support imports, even without disruptions to Middle East oil supplies due to war on Iraq, meaning consumers will continue to see unusually high pump prices for gasoline.

"While we may just be hours away from the beginning of the end of this chapter on Iraq, we may still be weeks, or even months away from seeing retail prices return to levels consumers are used to paying, thus returning to a sense of 'normalcy' in oil markets," the EIA said.

www.bayarea.com Posted on Wed, Mar. 19, 2003
By Michael Bazeley Mercury News

Californians who have been reeling from soaring gas prices got a dose of good news Tuesday as crude oil prices -- a key factor in what consumers pay at the pump -- plunged to their lowest level in two months.

That, along with an uptick in gasoline production by California refineries, could finally stabilize and even drive down gasoline prices, analysts said.

The April futures contract for crude oil plunged $3.26 a barrel Tuesday on the New York Mercantile Exchange, closing at $31.67 a barrel. Just a week ago it was trading at nearly $38, a 12-year high.

Today was the biggest drop in oil prices I've seen since I've been here,'' said Mark Mahoney, West Coast markets editor for the Oil Prices Information Service. Our traders haven't seen a day like this since 1991.''

Analysts and traders said President Bush's ultimatum Monday night to Saddam Hussein lifted a blanket of uncertainty that has destabilized the world oil market. Many investors are now anticipating a quick war with Iraq that will not disrupt oil supplies.

I think the traders are pretty confident that starting the war will improve the outlook for oil,'' said Severin Borenstein, director of the University of California Energy Institute in Berkeley. They apparently think this will lead to improved production compared to what they were otherwise expecting.''

Consumers will not see an immediate benefit at gas stations, however. Assuming the lower crude oil prices hold, it could take up to two months for gas prices to drop.

Refineries will need to sell off inventories built up at higher prices. And the cheaper crude oil will take weeks to be shipped and transported to U.S. refiners.

The United States consumes roughly 19.5 million barrels of crude oil a day, more than half of it imported.

In the Bay Area, gas prices have jumped 24 percent since January, from $1.72 a gallon to $2.14 a gallon, according to AAA of Northern California.

Price speculation

Whether prices will drop to last year's levels is not known.

Bay Area oil analyst Norm Higby, who tracks California gas prices, predicted consumers will be paying 40 to 50 cents a gallon less by August. Higby said oil companies have intentionally drawn down inventories to help drive up prices and that a post-war oil glut will force supply levels back up.

The demand will not be there and there will be additional supply,'' Higby said. All the refineries are going to have a glut of supply.''

But others predicted a gradual drop in gas prices, perhaps by just a few cents per gallon initially.

Unfortunately, when oil increases, gas prices skyrocket up, and when it decreases, they feather down,'' said Dennis DeCota, executive director for the California Service Station and Automotive Repair Association, which represents brand and independent gas stations. It will float down if crude continues to drop. . . . We're talking pennies.''

Volatile for months

A couple of factors keep upward pressure on California gas prices, Borenstein said. One is the cost of the ongoing switch from an MTBE fuel to ethanol. The other is a lack of refining capacity in the state, which is forcing California to import more expensive gas from other states.

We're hitting the boundaries of how much you can produce with limited refining capabilities,'' Borenstein said. There's no question a reduction in crude will help gas prices, but I don't think we'll see prices like we saw last year.''

Despite those issues, gasoline production in California increased 18 percent this week, according to the California Energy Commission. The spot market price for wholesale gas dropped a nickel over the weekend.

Traders said world oil prices probably will remain volatile in the coming months. U.S. supplies remain tight, and the Middle East situation is still unpredictable.

Commercial stockpiles of crude in the United States are at 269.8 million barrels, 18 percent below year-ago levels, according to the Energy Department. Supplies have dwindled as a result of high demand for heating oil in the Northeast and fewer imports from Venezuela.

Production surge

But traders are feeling more confident every day about oil supplies. Venezuela, whose oil industry was crippled by a nationwide strike, is now producing enough oil to make up for any Iraqi shortfall. And Saudi Arabia, the world's largest oil producer, reportedly has increased its production by 1 million barrels a day to more than 9 million barrels a day. The Saudis also have nearly 50 million barrels of oil in reserve, the New York Times reported, and could release it if global supplies are disrupted.

Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York, said traders are coming to the conclusion that the world has enough oil to meet demand, even if Iraq's daily oil production is eliminated.

``The war premium is definitely off the oil market,'' Mahoney said.