<a href=www.nytimes.com>Web MARKET INSIGHT By KENNETH N. GILPIN

OIL prices have fluctuated wildly in recent weeks. They bumped up against $40 a barrel on Feb. 27 but now stand at around $30.

Frederick P. Leuffer, senior energy analyst at Bear Stearns, talked last week about the effects of the Iraq war on oil supplies and the direction of oil prices — as well as the implications for big international oil companies. Following are excerpts from the conversation:

Q. In the last 12 months, there have been major oil supply disruptions in Iraq, Venezuela and Nigeria. How does the current situation compare with that of the Persian Gulf war?

A. There are a lot of differences between now and 1990-1991, but there are a lot of similarities. In 1991, we lost up to 5 million barrels a day from Iraq and Kuwait combined. Iraqi production now is about 2.3 million to 2.5 million barrels. Before the strike, Venezuelan production peaked at about 3 million barrels. Now, they are back up to just over 2.4 million. And the drain from Nigeria is about 800,000. But not everybody has been out at the same time.

Q. Based on what we know now about conditions in Iraqi oil fields, how high could production go after the war?

A. If the war goes well and the northern fields, which represent about half their production, are not damaged, it is conceivable you could see Iraq producing 2.5 million to 3 million barrels a day within a month after the end of the war.

Q. Will falling oil prices be enough to increase global demand for oil?

A. We are estimating world demand growth at 2 percent this year, but only because we expect crude oil prices to fall sharply. If oil prices are sticky in the high $20-a-barrel range or low $30's, I expect the economy will not do so well, and that demand will be tempered.

Q. Do you expect gasoline prices to rise more this summer?

A. I think gasoline prices are likely to be pretty high, but maybe not as high as they are right now. There is sufficient gasoline-making capacity, and unless there is an unexpected event at refineries, we won't see shortages, and prices will come off current levels.

Q. How have big oil companies reacted to developments over the past year?

A. Exploration budgets haven't moved up very much, which may show better discipline on the part of the companies. Skepticism is very high that spot oil prices will be $25 a barrel, let alone $35 or $40. They tend to base their exploration budgets on prices of around $18 a barrel. And they are using this windfall as an opportunity to pay down debt.

Q. Why haven't shares of big oil companies performed well in recent months?

A. Ever since oil went through $25 a barrel midway through last year, oil stocks have underperformed the market. But the Standard & Poor's integrated oil index is yielding about 3 percent right now, which suggests there is probably not a lot of downside risk in the stocks. But I think they will be left behind in a rising stock market, which in part will be driven higher by a drop in oil prices. That is what happened in 1991.

Back then, the Standard & Poor's 500 index was up 26 percent for the full year. The S.& P. oil composite index was up only 4 percent. The groups that will do well in the next rally will be the heavy users of oil, not the companies that produce it.

Q. Is there a case to be made for holding oil company shares in a diversified portfolio?

A. There is something to be said for holding some oil shares all the time. Over the last 20 years, Royal Dutch/Shell and Exxon Mobil have outperformed the S.& P. 500, so a buy-and-hold strategy for high-quality companies has rewarded investors.

Q. Even though you expect oil prices to fall sharply, there are still a couple of stocks that you like. Could you talk about them?

A. BP is my top pick right now. It is yielding close to 4 percent, they have raised the dividend three times in the last year and they are in the midst of a $2 billion share repurchase program. Also, they will grow oil and gas production between 4 percent and 5 percent a year over the next five years. I don't expect a lot of downside risk.

Royal Dutch/Shell is much the same story, but with a bit higher dividend yield. The stock took a hit when it was taken out of the S.& P. 500 index as part of a decision to eliminate foreign stocks. But we see decent growth for this company, and I would expect they will continue to raise the dividend. For the last 14 years, they have increased dividend payouts twice a year.

We also like ChevronTexaco. The stock has been under a lot of pressure because it has posted disappointing earnings in three of the last four quarters. But statistically it is very, very cheap. If they can get more aggressive on cost cutting, the stock is undervalued. 

Reference

WASHINGTON -- The Energy Information Administration March 26 was guarded in its optimism over the fact that imports from Venezuela last week seem to have returned to normal levels for the first time since Dec. 6, 2002.

At the same time, "the price of West Texas Intermediate crude has recently dropped below $30 per barrel for the first time since mid-December," the report added.

But do these statistics "signal a return to a more stable oil market? Well, not so fast," EIA's March 26 report stated.

"Total commercial petroleum inventories are currently nearly 91 million barrels below the middle of the normal range.

"To get both crude oil and petroleum product inventories to increase, more crude oil needs to be imported in order to build up crude oil stocks and increase inputs into refineries," the report stated.

EIA estimates that it would take more than three months for this to happen and that imports would have to average 10.4 million barrels each day in the second quarter. "And if supplies arrive at a pace averaging nearly 10 million barrels per day, which may even be optimistic," the report stated, "inventories would not return to the middle of the range [of supply] until sometime in September."

The report noted that retail diesel prices were down for the second consecutive week as of March 24, with Midwest prices falling the most -- 11.2 cents per barrel -- to 159.6 cents a gallon. New England prices remained the highest in the nation, according to the report, although they had decreased 9.9 cents to 189.2 cents per gallon.

EIA information explained that while "global [petroleum] product demand" historically falls from April through June because of warmer weather, crude oil demand doesn't, and that in the U.S. both crude and petroleum product demand increase in the second quarter. So, inventory levels are more likely to increase by more imports than by decreased demand, it concluded.

As to where those imports would come from, the report didn't speculate. And it did not mention any effect of the war with Iraq on inventories.

-- The Trucker staff March 28, 2003

<a href=www.canada.com>Freelance PETER HADEKEL Friday, March 28, 2003

The war's outlook is as clouded as the sand storms blowing through the Iraqi desert. And so is the outlook for oil and gasoline prices.

Early optimism about a rapid and successful outcome in Iraq sent oil prices plunging by 30 per cent last week, sparking a huge rally in the stock market.

But as traders and investors remained glued to their TV screens this week, crude-oil futures began to rise with the realization that the war won't end quickly.

First, the good news.

"There is more oil in the market than it can absorb," OPEC president Abdullah al-Attiyah declared yesterday. "This is obvious from the fact that prices have dropped."

Production in other Middle Eastern countries has not been disrupted and is running smoothly.

Crude-oil futures in the U.S., which traded yesterday at around $30 a barrel, are much cheaper than they were last month, when they hit $40. Fears of gasoline prices hitting $2.50 a gallon in the U.S. have receded.

So have fears that retreating Iraqi troops would torch the country's oil fields, as they did during the 1991 Gulf War.

Most of the wells in southern Iraq, the centre of the country's industry, have been secured by coalition troops, and oil-well recovery teams are poised to fly into Iraq to restore as much production as they can.

Now, the bad news.

A British military official said Iraq's Rumaila oil field, the country's largest, is in bad shape and will require investment of at least $1 billion to restore its production of 1.8 billion barrels a day.

By some estimates, it will take at least three months for oil exports to resume from southern Iraq.

This will not help to ease fears of looming crude shortages elsewhere.

While oil production in strike-torn Venezuela has stabilized, there are new concerns about instability in Nigeria, the fifth-largest oil exporter to the U.S. market.

Royal Dutch Shell, Chevron Texaco and Total Fina Elf are among oil companies that have shut down operations in Nigeria because of clashes between soldiers and ethnic militants.

The violence has halted production of 800,000 barrels a day - almost 40 per cent of Nigeria's oil production.

For the U.S. domestic economy, this complicates an already tight supply situation. The Department of Energy this week reported a larger-than-expected decline in gasoline inventories, raising fears about supply shortages during the summer driving season. The DOE said inventories are about seven per cent below where they would normally be at this time of year.

U.S. pump prices are about 30 cents a gallon higher than they were a year ago, according to the American Automobile Association.

"Current inventory levels are below the tight levels of 2000, and well below the surpluses that existed during the 1991 Gulf War," said Steven Pfeifer, Merrill Lynch's senior Integrated Oils Analyst. Inventories need to start climbing now in order to avoid a summer spike in gasoline prices.

Many parts of the country suffered the coldest winter in years, putting further pressure on refiners.

The importance of oil and gasoline prices to the U.S. economic recovery can't be overstated. Soaring prices over the last few months have acted like a big tax increase on U.S. consumers and businesses.

But while the consensus among economists is that a short war will send oil prices back to the $25 range, the risks of prolonged conflict remain.

phadekel@videotron.ca

USA Today Posted 3/27/2003 10:38 PM
By Barbara Hagenbaugh and James R. Healey

Oil prices are rising again as concerns grow that the Iraq war will be longer than expected and that unrest in OPEC member Nigeria will lead to supply problems.

West Texas Intermediate crude oil for May delivery rose $1.74 to $30.37 a barrel Thursday, a 6.1% increase. It was the second consecutive day of gains and the first time prices were above $30 since the war started.

But the average price of a gallon of regular unleaded gas slipped to $1.671, motorists' club AAA reported. That was down nearly a penny overnight — considered a big change — and is down from the record U.S. average of $1.722 per gallon set last week.

Analysts say oil prices will likely go higher — leading to a reverse in recent gas price declines — if more news from Iraq suggests the war might drag on or if it becomes clear the unrest in Nigeria, the fifth-largest source of U.S. oil imports, is more than temporary. Other issues, including low inventories and the switch to special-blend gas for summer, will also tend to push gasoline prices higher.

"There's just not enough oil produced elsewhere in the world to make up for all of those disruptions," says Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.

Brown says higher oil prices are likely acting as a drag on the economy. When consumers and businesses have to spend more on energy, they have less to spend in other parts of the economy or to hire new workers.

Oil output in Iraq, which normally pumps about 2 million barrels per day, has been halted. Key oil fields secured by British forces earlier this week will take three months to repair, United Kingdom Air Marshal Brian Burridge said Thursday. British forces found the 500 oil wells in disrepair and booby trapped with detonation devices.

In addition to the problems in Iraq, fighting between tribes in Nigeria has led to an approximately 40% cut in oil output in the country that exports little else. Oil giant Royal Dutch/Shell announced shipment delays Thursday as foreign oil firms said a truce among warring tribes would spell no quick return to oil fields after workers fled.

Markets have been shaky for months as unrest in Venezuela took much of that country's oil off the market. While production there seems to have come almost completely back, oil watchers are wondering if the South American nation can maintain output levels with the fewer workers it now has.

American Petroleum Institute chief economist John Felmy called the situation a "perfect storm" for prices.

Contributing: Donna Leinwand in Doha, Qatar, and wire reports

See Source 08:59 PM EST Mar 28 MALCOLM MORRISON

TORONTO (CP) - Stock markets closed lower but well above the lows of the session Thursday as investors faced the realization that the war in Iraq won't be over in a matter of days.

"This thing is going to go on for a while. President Bush said today it'll be over when it's over, when we win. And so we have to be prepared to live with it for a while," said Fred Ketchen, manager of equity trading at Scotia Capital. In New York, the Dow Jones industrial average came back from a 125-point loss to close with a decline of 28.43 points at 8,201.45, on the lowest volume in two weeks.

Toronto's S&P/TSX composite index lost 3.46 points to 6,353.44. The TSX Venture Exchange rose 3.42 points to 1,044.10.

The absence of Iraqi crude oil, low inventories and supply interruptions in Nigeria and Venezuela forced the price of oil past the $30 US a barrel level, moving up $1.74 to $30.37 US a barrel. That kept the TSX energy sector positive with EnCana rising $1.23 to $47.91.

The Canadian dollar hit its best close since April 2000. As the American dollar weakened amid war anxiety, the loonie was up 0.30 cent at 68.36 cents US.

The Nasdaq composite index moved 3.20 points lower to 1,384.25 while the S&P 500 index was up 1.44 at 868.52.

"There hasn't been any particularly huge disaster here," said Ketchen.

"Those who thought this was going to be a three-, five- or seven-day war are coming to the realization that that was far overly optimistic given the size of the country."

Declines this week have come after an impressive eight-session runup fuelled by expectations that markets would rally strongly, as they did in the last Gulf War in 1991.

"Everybody you talk to in the last week was very skeptical about this runup," said Scott Kinnear, economist at MMS in Toronto, but investors were still inclined to pile into it.

"The runups have been so few and far between in the past two or three years, to sort of miss out on one now would be pretty tough on portfolio managers."

The release of a major report on bank mergers didn't have much effect on the TSX financial sector, which was down slightly. The Commons finance committee report recommends that merging banks be required to guarantee service levels, minimize job losses and protect rural customers.

It was a mixed performance in the sector as Bank of Montreal lost 99 cents to $40.96 but Royal Bank was up 47 cents at $58.30.

Markets kept their gaze fixed on the war and ignored economic reports.

Statistics Canada said higher fuel prices pushed raw materials prices up 22.6 per cent in February compared with a year earlier.

In the U.S., the latest revision to fourth-quarter gross domestic product showed the American economy grew at a mediocre 1.4 per cent annual rate.

In another report, U.S. claims for unemployment benefits fell last week by a seasonally adjusted 25,000 to 402,000.