reuters.com Wed March 5, 2003 02:43 AM ET By Tanya Pang

SINGAPORE (Reuters) - Oil prices firmed further on Wednesday, looking to key data on U.S. fuel stockpiles to drive direction in the short-term as the United Nations continued to debate possible war in Iraq.

Brokers said another bombing in the Philippines injected fresh uncertainty into the market along with news that members of the Russian business community in Iraq were leaving.

U.S. light crude CLc1 traded 32 cents higher to $37.21 a barrel after Tuesday's $1.01 rally in New York.

"Although there is no direct link with the Philippines and oil, people are taking the bombings as an overall rise in terror tensions and an area of concern," said analyst Lawrence Eagles at brokers GNI-Man in London.

"News that Russian families are pulling out of Iraq has also raised expectations of a step closer to war. But the U.S. data will dominate today," he said.

Police said a home-made bomb exploded in the southern Philippine city of Cotabato on Wednesday, a day after a bomb attack killed 21 people at an airport to the east, which military officials blamed on the Muslim separatist group the Moro Islamic Liberation Front. The MILF denied any involvement.

U.S. crude has swung in a wide range of more than $4.50 in the last five trading days after touching a 12-year peak at $39.99 on February 27, and is about 20 percent higher then at the start of the year.

The prospect of a war in oil exporter Iraq comes at a time when crude stocks in the United States are hovering at low levels not seen since the mid-1970s, increasing anxiety that the world's biggest oil consumer may face a supply crunch.

Apart from lower sales from strike-bound Venezuela, which normally supplies 13 percent of U.S. imports, traders fear war in Iraq may disrupt supplies from other producers in the Middle East, which pumps about 40 percent of globally traded crude oil.

OPEC REASSURES

The OPEC producers cartel has sent reassurances to the market that it will cover any shortfall to world supplies should a military attack on Iraq disrupt its crude exports of roughly two million barrels per day.

But traders and analysts say that most members of the Middle East-dominated group are already pumping at full tilt and the Organization of the Petroleum Exporting Countries has little spare capacity to utilize, except kingpin producer Saudi Arabia.

"We're looking for crude to move above $40 when the attack is launched on Iraq. Even if OPEC does increase production we still see supplies remaining tight," said Tetsu Emori, chief strategist at Mitsui Bussan Futures in Tokyo.

The U.S. government Energy Information Administration (EIA) will release later on Wednesday its weekly status report on the health of U.S. fuel stocks. Analysts predict crude supplies will increase slightly but winter heating oil stocks will fall.

In a Reuters poll, six analysts forecast U.S. crude inventories to show a rise of 1.25 million barrels as Saudi Arabia bumped up imports to its ally.

The survey showed stocks of distillates, including heating oil, falling by two million barrels with demand still running high as a severe spell of unusually cold temperatures continued.

Heating oil stocks fell below 100 million barrels last week for the first time in three years, EIA data showed.

Analysts pegged gasoline tanks declining by 500,000 barrels.

MORE TROOPS TO GULF

The United States ordered 60,000 more troops into the Gulf region on Tuesday in its preparations for a military strike on Iraq, which it says is not in full compliance with U.N. demands to disarm weapons of mass destruction.

The United States and Britain has already amassed a 250,000-strong force in the region.

Secretary of State Colin Powell said Washington was gaining support on the U.N. Security Council for a new resolution against Iraq, which at the weekend began to destroy its illegal al-Samoud 2 missiles.

Washington, backed by Britain and Spain, is meeting resistance for a new U.N. resolution permitting military force from Russia, France, China and Germany.

The Interfax news agency on Wednesday quoted a Russian diplomat in Baghdad as saying that about 150 members of the Russian business community in Iraq were flying out.

U.S. preparations hit a snag at the weekend when Turkey's parliament voted against the deployment of U.S. troops on its soil, which would have given access to northern Iraq.

Turkey's government said on Tuesday it was considering a second try at winning parliamentary approval.

www.chron.com March 4, 2003, 10:59PM

NEW YORK -- Crude oil futures rallied Tuesday, staging a sharp recovery after three straight sessions where prices declined on hopes that a war with Iraq could be averted.

Between Thursday and Monday, prices fell sharply as Iraq's increased cooperation with U.N. weapons inspectors and Turkey's rejection of access to U.S. troops sparked speculation that a U.S.-led attack on Iraq could be avoided, or at least delayed by several weeks.

But prices turned around Tuesday as the United States stepped up military preparations for a war and indicated it would seek U.N. Security Council approval of a resolution on military action next week, analysts said.

At the New York Mercantile Exchange, light, sweet crude for April delivery rose $1.01 to end at $36.89.

April heating oil futures ended up 1.26 cents at $1.0486 a gallon, while April gasoline futures climbed 1.74 cents to settle at $1.1122 a gallon.

Natural-gas futures fell for the second day in a row as above-normal temperatures in the Midwest and East were forecast to pare heating use. Gas for April delivery retreated 12.1 cents to settle at $7.041 per thousand cubic feet.

At London's International Petroleum Exchange, April Brent futures rose 61 cents to close at $33.09 a barrel.

Exxon Mobil Chairman Lee Raymond said Tuesday the Bush administration could release emergency crude reserves if there is war with Iraq, depending on the extent of disruption to oil supply.

"It's clear if there's going to be a war, then Iraq is going to stop exporting," Raymond told analysts in New York.

"The U.S. government could release some oil from the SPR," he added, referring to the strategic petroleum reserve, "I wouldn't want to suggest to you that there will be clarity on this at all. There are a lot of what ifs' and whens.' "

Energy traders worry that an attack on Iraq could disrupt the flow of oil from the Persian Gulf.

Meanwhile, OPEC and non-OPEC oil ministers will meet next week to discuss what they could do in the event of a war in Iraq, an official from the Organization of Petroleum Exporting Countries said.

OPEC countries have increased production in recent months in response to a strike in Venezuela and soaring oil prices.

According to a Dow Jones Newswires survey, OPEC crude output jumped by 1.43 million barrels a day to 27.091 million barrels a day in February from January.

onebusiness.nzoom.com

Looming war in Iraq and a Venezuelan workers' strike have stolen the headlines in the build toward $US40 oil, but it is a decade-long shrinkage of the US energy industry that underlies the soaring price.

As energy companies bid to improve profit margins by cutting costs, oil and natural gas drillers are pumping less supply from the US mainland, while unprofitable refiners have closed plants and drained storage tanks, analysts said.

The result: a US energy supply system that finds it increasing vulnerable to supply shocks, leaving fuel consumers at home and abroad more exposed to sudden price rises.

"The oil industry has been generally underinvested in last 20 years ... so what happens is if we get into a situation where we get a hiccup in the oil balance and you get these very leveraged affects on price," said Mike Rothman, analyst at Merrill Lynch bank.

The US supply shortage has undercut the ability of the Opec oil producer cartel -- itself now bumping up against production capacity limits -- to keep oil price rises under control. Opec meets next week to decide policy in the event of war in Iraq.

US oil companies keep on hand about 1 billion barrels of spare supply of crude oil and oil products like gasoline, worth tens of billions of dollars. But when oil prices drop, the cost to refiners can be overwhelming, as inventory on hand loses value.

Plagued by poor profits for much of the 1990s, US oil refiners increasingly used computer software to manage inventories more efficiently and whittle down the stock cushion they keep on hand. The shift gained pace in the Internet boom.

"If refiners wanted to maintain share price in an environment of high tech stocks they're going to do everything to cut costs," said Sarah Emerson, director of Boston-based Energy Security Analysis Inc (ESAI).

Low stocks, high prices

From February 1993 to this year commercial crude inventories have fallen 18% and now stand at the lowest level since 1975, according to government figures. The lack of oil last week pushed crude prices to within a penny of hitting $US40 for the first time in 12 years.

"Throughout the US energy industry, assets and activity have been undervalued by markets," said Paul Horsnell of J.P, Morgan bank.

This winter the slow inventory evaporation has been accelerated by a anti-government Venezuelan strike that has chopped oil exports of the world's former No. 5 supplier by one-third, or 1 million barrels per day (bpd).

UScrude stocks have dropped to the minimum 270 million-barrel level the government says is needed to keep supplies flowing smoothly -- just as the international oil system braces for war in Iraq, which ships around 4% of world crude exports.

The sheer size of the energy needs of the United States -- which consumes a quarter of the world's oil and imports 60 percent of its fuel -- means higher U.S. prices ripple through to Europe and Asia, even though supplies there are not nearly as tight.

"The United States has probably been the most active (nation) in terms of moving toward a lower average level of inventories for petroleum," said Dave Costello economist at the federal Energy Information Administration (EIA).

Winter woes

A long, cold winter has pulled US heating oil stocks to their lowest levels in nearly three years. Gasoline stocks, which should soon be building for summer driving demand, are 11% lower than last year.

Supplies have now fallen to dangerous levels, said Matthew Simmons, oil consultant with Simmons and Co, in Houston. "We got here over a decade, as a result it's going to take long time to figure out how we get out of this hole," said Simmons.

Cost-conscious companies' reluctance to drill for new supplies has also helped press prices for natural gas -- a rival heating and industrial fuel -- to all-time highs for the second time in three winters.

"This is not the sign of a market that is either working well or playing a constructive role in the US economy," said JP Morgan's Horsnell.

And as companies curb spending, US oil reservoirs on the mainland are drying up. From 1990 to 2002 domestic crude production has fallen more than 20% to 5.82 million barrels daily.

"The effort to produce has gone elsewhere, to the former Soviet Union and West Africa as well as Mexico," said the EIA's Costello.

The current structure of oil futures -- in which later months are greatly discounted to current prices as traders bet the prices will fall after a US victory in Iraq -- gives no incentive for companies to start storing more.

"Right now there's no reason at all for any refiner to put anything into a tank." said ESAI's Emerson. "Do you want to buy $37 a barrel crude and sell it at $25 in two or three months?"

Source: Reuters

www.morningstar.ca 4 Mar 03(3:35 PM) | E-mail Article to a Friend By Andrew Mitchell

NEW YORK (Reuters) - Oil prices rose nearly 3 percent on Tuesday as the United States stepped up its military build-up in the Gulf and dealers speculated Turkey would ultimately agree to allow U.S. troops to use its territory as a launchpad in any attack on Iraq.

U.S. light crude rose $1.01, or 2.8 percent, to $36.89 a barrel, about three dollars below 12-year highs hit late last week. In London, Brent crude settled 61 cents higher at $33.09.

The gains marked a rebound from sharp losses on Monday after the Turkish parliament voted against allowing U.S. troops to use Turkish bases for a possible attack on Iraq, the world's eighth biggest oil exporter.

Turkish Foreign Minister Yasar Yakis indicated on Tuesday the government was considering a new parliamentary motion to approve the deployment of U.S. troops.

"It's fair to say that a lot more pressure is being put on Turkey," said Rob Laughlin of GNI-Man Financial.

Oil prices have risen 20 percent since the start of the year on fears that war in Iraq could upset supplies from the Middle East which pumps a third of the world's oil.

U.S. President George W. Bush has said the United States will oust Iraqi President Saddam Hussein by force if he did not surrender his alleged weapons of mass destruction.

The Pentagon announced it is sending 60,000 more troops to the Gulf, to join a massive build-up of more than 250,000 U.S. and British forces already in the region for a possible war with Iraq.

Washington wants U.N. Security Council support for possible military action, but France, Russia and China -- three of the council's five veto holders -- say U.N. arms inspectors in Iraq should be given more time.

Russian Foreign Minister Igor Ivanov said on Tuesday that his country will not support any measure leading to a war in Iraq and may wield its veto power at the Council for that purpose.

Chief U.N. weapons inspector Hans Blix will give his next briefing to the U.N. Security Council on Friday.

STOCKPILES LOW

Anxiety about possible disruption of oil supplies should war be declared is all the more acute because fuel stockpiles in the United States -- which consumes a quarter of global oil supply -- are already at perilously low levels.

Crude stocks are at the lowest level since 1975 after an oil strike in Venezuela drained inventories. Supply reports to be published on Wednesday are expected to show a further draw on stocks after recent Arctic weather in the United States.

Meanwhile, U.S. households are facing all-time high heating oil and natural gas prices strengthening concern that rising energy costs could further sap an anemic economy.

OPEC officials have pledged that the Organization of the Petroleum Exporting Countries, which meets in Vienna next week, would abandon its production quotas and pump at will in the event of war.

Leading OPEC producer Saudi Arabia already is pumping nine million barrels per day of its 10.5 million bpd capacity and most others in the cartel have no spare production.

If OPEC has insufficient spare capacity, consumer countries represented by the Paris-based International Energy Agency have said they will release emergency strategic reserves for the first time since the 1991 Gulf War.

The chairman of the world's biggest oil company Exxon Mobil said on Tuesday the United States could release emergency crude reserves if there is war with Iraq, depending on the extent of disruption to oil supply.

"It's clear if there's going to be a war, then Iraq is going to stop exporting," Lee Raymond told analysts in New York.

U.S. Energy Secretary Spencer Abraham said last week that the United States was prepared to act quickly to release emergency crude oil reserves if needed to offset a severe disruption to Middle East supplies.

money.cnn.com

March 3, 2003: 1:16 PM EST

KUWAIT (Reuters) - Kuwait may have to shut down 700,000 barrels per day, or one third of total oil output, if war erupts on Iraq, intensifying fears markets could be short of more than just Iraqi supplies during a conflict.

Two production hikes already this year have left OPEC with just enough spare capacity to cover a potential disruption in Iraqi exports of close to two million barrels per day (bpd).

Even a 400,000 bpd outage from Kuwait could stretch the cartel beyond its capacity and might necessitate the release of emergency petroleum reserves from major consuming countries.

The state Kuwait Oil Co said it would shut its northern oilfields near the border with Iraq as a safety precaution, closing 400,000 bpd of Kuwait's 2.1 million bpd. It also said the 300,000 bpd western Manakish oilfield might be closed.

"Kuwait will close all its northern oilfields when a possible war starts to safeguard the workers in these fields," KOC Chairman Ahmad Rashid al-Arbid told the official Kuwait News Agency.

Arbid said Kuwait would try to cover the shortage from other western and southern oilfields. The Gulf producer has already closed two small northern oilfields -- totalling 25,000 bpd.

For its part, OPEC sought to assure markets it would remove supply limits and pump flat out if a U.S.-led war were to halt oil exports from Iraq, the world's eighth largest exporter.

Asked in a BBC interview broadcast Monday whether OPEC would remove its production ceiling if war were to disrupt Iraqi oil supplies, OPEC President Abdullah al-Attiyah said: "Yes. If there is a shortage and the world needs more oil, we will do it...We will pump maximum capacity if the market needs it." Contingency plans

The cartel is likely at its March 11 meeting to set up a war contingency plan to suspend quotas once hostilities start. OPEC temporarily abandoned output limits shortly after Iraq invaded Kuwait in August 1990 to cover outages from the two producers.

Kuwait was swift to lend its support to a suspension of OPEC's ceiling -- lifted twice already this year to cover a shortfall from strike-bound member Venezuela.

"Whatever OPEC will decide, Kuwait will cooperate," Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah told Reuters.

In any case, most analysts say OPEC has few extra barrels to dispense -- little more than Iraq's 1.7 million bpd of exports.

With only Saudi Arabia holding substantial spare volume, actual cartel supplies will depend on how much more Riyadh decides to pump.

The kingdom, the world's biggest oil exporter, is already producing just over nine million bpd, and stands ready to pump to its 10.5 million bpd capacity.

If OPEC has insufficient spare capacity, consumer countries represented by the Paris-based International Energy Agency have said they will release emergency strategic reserves for the first time since the 1991 Gulf War.

The price of oil was lower in London trading Monday morning, as a barrel of Brent crude for May delivery was off 47 cents to $31.35.