www.globeandmail.com By MATHEW INGRAM Globe and Mail Update

The price of crude oil has skyrocketed over the past several months, partly as a result of concerns about supply from Venezuela and partly because of market speculation as the United States gears up for a war with Iraq. On Thursday and Friday, crude came within a hair of $40 (U.S.) a barrel, close to the peak it hit after Iraq invaded Kuwait in 1990. So that means investors should run out and load up on oil stocks, right? Not so fast.

Like most heavily traded commodities — such as gold, for example — supply and demand are only part of the equation when it comes to oil prices. The current price, which is hovering in the $39 range, is a result of supply glitches in Venezuela and higher demand for fuel oil in the United States due to cold weather, but it is also driven by an army of commodity traders, and theories about what may happen a month or two from now.

Based on simple supply and demand, the price of crude should probably be in the mid- to upper $20 range somewhere, depending on which market expert you talk to. The rest of the current price is a result of speculation by oil traders about what will happen if war is declared, whether Saddam Hussein will decide to blow up his own oilfields, whether OPEC will be able to deal with any supply disruptions, and so on.

Some traders are betting that a war with Iraq would be over fairly quickly, and that once it is finished the price of oil will return to normal levels. This is based largely on the fact that it's exactly what happened after the Gulf war. Traders betting on that scenario have been short-selling oil, and some of the price rise in recent days has been blamed on short-sellers having to buy to cover their bets.

The opposite end of the spectrum has traders not only betting that the war in Iraq will go on longer than it did in 1991, but also that it might destabilize the rest of the Middle East, which could make the supply of oil from other OPEC producers less reliable as well. The combination of those events has some oil industry watchers predicting that oil could stay above $40 for some time, and might even get to $70 or $80.

The chance of that more extreme version of events taking place is fairly low, most oil industry analysts say. According to Philip Verleger, an oil industry economist and senior fellow at the U.S. Council on Foreign Relations, even if a war stops the flow of oil from Iraq completely, the other OPEC nations — and Saudi Arabia in particular, the cartel's largest producer — will likely step in to help cover that supply.

According to Mr. Verleger's comments at the Institute for International Economics, the oil-producing nations would do this for a couple of reasons, the first being that skyrocketing oil prices would be bad for the global economy — and that would be bad for business in the long run. The other reason is that high prices would encourage non-OPEC nations such as Russia — which already produces almost as much oil as Saudi Arabia — to produce even more, and that would cut OPEC's market share.

But even under a moderate scenario, won't producers enjoy windfall profits, and therefore aren't their stocks sure to go up? After all, Canadian Natural Resources just said its fourth-quarter profit tripled over last year, and it could make $1-billion (Canadian) more in profit this year than it expected to a month ago. Unfortunately, it's not that easy to draw a straight line between higher crude prices and higher stock prices.

Take a look at what happened to Canadian Natural's stock after it made that announcement. You might expect that $1-billion extra dollars on the bottom line, even for a company that size, would make a major difference — after all, it works out to more than $7 per share. And yet the stock rose by less than $3 after the news, and at $50 or so isn't even as high as it was last fall. It has climbed by 25 per cent since October, but the price of crude oil has climbed by more than 60 per cent since then.

"Institutions never pay for peaks, nor do they pay for valleys," FirstEnergy analyst Martin Molyneaux told Globe and Mail reporter Guy Dixon recently. In other words, investors won't pay more for a stock if they don't think high oil prices are sustainable, even though the company might seem to be worth a lot more. The risk that the price increase won't be sustainable translates into a lower multiple for those stocks.

Of course, oil and gas stocks (because most companies do both) have been going up based on more than just crude prices. Natural gas is also high, in part because of cold winter weather, and a sharp drop in inventories. That could help justify higher prices even if crude oil does come back down in price — but it isn't going to produce a windfall for investors at this point, given how far some stocks have already climbed.

E-mail Mathew Ingram at mingram@globeandmail.ca Look for exclusive Mathew Ingram commentary at GlobeInvestorGold

seattlepi.nwsource.com Friday, February 28, 2003 · Last updated 2:39 p.m. PT By BRUCE STANLEY AP BUSINESS WRITER

LONDON -- A recent surge in Saudi Arabian oil production should help cool sizzling prices when crude shipments from the Persian Gulf reach U.S. ports within a month, industry analysts said Friday.

Prices eased a day after spiking to a 12-year high in the United States on concerns about tight supplies. Some analysts said OPEC member countries were pumping furiously and argued that the current market turmoil would ease once these fresh barrels hit the market.

"A lot of the crude produced in January has not yet arrived. The situation may change drastically," said a senior source at the Organization of Petroleum Exporting Countries.

Fears of a war with Iraq are partly to blame for the latest run-up in prices. April contracts of U.S. light, sweet crude climbed as much as $2 on Thursday to peak at $39.99 a barrel in New York, the highest level since October 1990, when Iraq occupied Kuwait. On Friday, the April conrtract fell 60 cents to settle at $36.60 in New York.

In London, April contracts of North Sea Brent fell 25 cents to end at $32.79 a barrel.

Fears that a war might create supply shortages have inflated prices by at least $5 a barrel, said the OPEC source, speaking on condition of anonymity from the group's headquarters in Vienna, Austria.

However, analysts said OPEC could probably make up the 2 million barrels a day that Iraq would be unable to export if fighting broke out in the Gulf. OPEC supplies about a third of the world's oil.

The cartel's most powerful member, Saudi Arabia, says it can produce up to 10.5 million barrels a day. That is substantially higher than the 8.5 million barrels a day that the International Energy Agency, a watchdog for oil-importing countries, said the country was producing in January.

"I think they're well above 10 million barrels, and pumping," said Peter Gignoux, managing director of the petroleum desk at Salomon Smith Barney. Much of this additional crude is already on its way to the U.S. East Coast, a journey lasting about 45 days.

"There is a considerable amount of oil en route from Saudi Arabia," agreed Lawrence Eagles, head of commodity research for London brokerage GNI Ltd. Although it was unclear how many barrels were actually in transit, Eagles said the market would be "relatively balanced" if this fresh Saudi oil was counted as part of the global supply.

The United Arab Emirates and other OPEC members that aren't already producing at full capacity could boost the cartel's output further to help make up for any missing Iraqi barrels. "Altogether they can cover it - barely," the OPEC source said.

The recent price spike was most pronounced in the United States, the world's biggest importer of crude. While Iraq has been a factor in this surge, analysts said cold weather and the fallout from a strike in Venezuela's oil industry have played a bigger role.

"We've lived without Iraqi oil before. This doesn't bother me," Gignoux said.

Venezuela is steadily ramping up its production in the wake of a crippling strike. It has boosted exports from 700,000 barrels a day a few weeks ago to 1.4 million barrels today, and further increases are expected, Eagles said.

However, U.S. importers were slow to seek alternative sources of crude when the strike first disrupted Venezuelan exports in December. This slow response, together with the longer time it takes crude to reach North America from Saudi Arabia, has helped cause a temporary squeeze in the U.S. market, analysts said.

On top of the surge in crude prices, heating oil soared to historic highs this week as snow buried large parts of the United States.

"In my world of oil," Gignoux said, "I've seen chaos this week."

www.oaoa.com By Julie Breaux Odessa American

Futures contracts on West Texas Intermediate crude oil traded wildly Thursday amid fears of an imminent U.S. invasion of Iraq and concerns over tight crude oil inventories. At the New York Mercantile Exchange, front-month April crude oil futures climbed as much as $2 to $39.99 a barrel, the highest level since October 1990, when prices set a record high of $41.15 after Iraq’s invasion of Kuwait. The contract settled at $37.20 a barrel, down 50 cents. On London’s International Petroleum Exchange, the volatility was less extreme. April Brent ended down three cents at $33.04 a barrel. Morris Burns, executive vice president of the Permian Basin Petroleum Association, said Thursday’s trading was reminiscent of the Gulf War. “This happened before the first Persian Gulf War in late 1991, early ’92. We had a price runup and it got around $40, but as soon as the first shots were fired, it got back down to around $25,” Burns said. Thursday’s early gains came amid concerns over tight U.S. crude inventories — now at their lowest level since 1975 thanks to cold weather and a strike in Venezuela — and growing jitters over a possible U.S.-led attack on Iraq, traders said. But, the U.S. government lowered its terror threat level from high to elevated — Orange to Yellow — citing the end of the Muslim hajj pilgrimage as a key factor, a move that pared oil’s gains, traders said. Nonetheless, Odessa mineral and royalty investor Kirk Edwards called Thursday’s surge in both crude oil and natural gas prices “absolutely bizarre.” Concerns over dwindling natural gas supplies lifted natural gas prices more than $2 on Monday to close at $9.14 per 1,000 cubic feet. On Thursday, natural gas for March delivery rose 9.5 cents to settle at $7.49/mcf. Edwards said the most recent drawdown of stored natural gas was the largest ever, “putting it on a record pace to be the lowest mark in storage history when the winter ends.” In Texas, sub-freezing temperatures Monday and Tuesday sent demand for natural gas and electricity soaring, said Bill Loos, general manager of Odessa-Ector Power Plant, the 1,000-megawatt natural-gas fired plant that generates power for Texas intrastate power grid. “We were very fortunate. We were not curtailed during the cold spell,” Loos said. In fact, the Odessa plant’s demand load increased as some natural gas providers curtailed supplies to power companies in East Texas in order to meet their own customers’ heating demands, Loos said. The supply imbalance sent the spot price electric companies pay for natural gas into orbit, Loos said. On Monday, the spot price of natural gas for 1 million British thermal units was $13.89. On Tuesday, the price almost doubled to $25.10/mmBtu, falling to $15/mmBtu on Wednesday. And electrical prices followed suit, Loos said. Electrical prices that usually run $40 per 1 megawatt-hour skyrocketed anywhere from $200 to $1,000 per megawatt-hour. The surge in energy prices, however, is having little effect on new drilling activity in the Permian Basin, Edwards said. But that doesn’t mean producers aren’t profiting from current production. “I would say probably across the board every oil-related company is making more money than they have because they’re not spending it on drilling right now,” Edwards said. “Even though prices are great, people are still on the sidelines, which means they’re flush with cash, not flush with drilling prospects.” Edwards said the lack of new drilling indicates to him that producers aren’t convinced the current price is anything but an anomaly. Still, those public school districts in the Permian Basin that depend on oil and gas production for tax revenue will be “very pleased” when they prepare their 2003-04 budgets this fall, Edwards said. “Ad valorem taxes that the oil companies will pay will be substantially higher next year due to the very high prices the year started out with,” Edwards said. Of the nearly $68 million in ad valorem taxes ECISD expects to collect in fiscal 2002-03, about $20 million will come from minerals, said Tonya Tillman, ECISD director of finance. The Associated Press contributed to this report. 

www.forbes.com Reuters, 02.28.03, 6:21 AM ET By Tanya Pang and Peg Mackey

SINGAPORE/DUBAI Feb 28 (Reuters) - OPEC is likely to establish a war contingency plan at its March 11 meeting that would suspend oil output quotas once hostilities start, senior officials and OPEC sources said on Friday. But the producer group that dominates world oil trade is very unlikely to lift output restrictions simply to contain prices before the meeting, they said. "The price now is not due to any shortage or fundamentals, its psychological," said one. While no formal proposal is yet in circulation, the sources said ministers are expected to put a plan in place for a temporary suspension of output limits at the Vienna gathering in two weeks' time. "There is no proposal for this yet," Indonesian Energy Minister Purnomo Yusgiantoro told Reuters on Friday. "But people are fully prepared to make up the production if there is no Iraqi oil." OPEC sources said the group probably would leave formal output limits unchanged at 24.5 million barrels per day (bpd) and prepare to suspend limits altogether if war erupts. Also an option is the immediate suspension of quotas at the March 11 gathering in a bid to calm prices in the final days before any war. Despite two production increases in the past two months, the cartel was powerless on Thursday to prevent prices spiking to a 12-year high of nearly $40 a barrel for U.S. crude. Speculators pushed prices to post-Gulf War highs as the run-up to military action against Iraq coincided with a slump in inventories of crude and products in the United States during a bout of very cold winter weather. U.S. crude on Friday traded at $37.36, up 16 cents. OPEC's March meeting, scheduled months ago, comes just days before Britain and the United States hope for a vote on a second resolution at the United Nations authorising war on Iraq. Some in the group with no spare capacity are reluctant to give free rein to Saudi Arabia, the only country with significant volumes of unused capacity. But all will want to avoid the need for a release of consumer country strategic stocks, controlled by the Paris-based International Energy Agency. The IEA, along with its most powerful member the United States, has said it will give OPEC the chance to fill any Iraqi stoppage. The group is already stretched, compensating for shortages from strike-hit Venezuela. Both the IEA and the U.S. Department of Energy have said they will wait to judge whether OPEC can handle an outage in war before they decide to release emergency reserves. Washington has the right to release reserves unilaterally from the stocks it holds above the 90-day minimum of forward supply required by IEA rules. The vast U.S. Strategic Petroleum Reserve holds about another 50 days of supply. Even with a free-for-all, OPEC does not have much extra oil to deliver -- little more than Iraq's 1.7 million bpd of exports. With only Saudi Arabia having access to significant extra volumes, actual cartel supplies will depend on how much more Riyadh decides to pump. Many independent analysts estimate the Saudis are already producing a million barrels a day more than their official 7.96 million bpd quota. That leaves it with 1.5 million bpd to spare, with the UAE able to call on a few hundred thousand barrels a day.

www.thisdayonline.com By Mike Oduniyi in Lagos and Kola Ologbondiyan in Abuja

President Olusegun Oba-sanjo yesterday assured Nigerians that fuel queues across the nation would disappear this weekend. The president's reassurance came yesterday as the Nigerian National Petroleum Corporation (NNPC) started pushing about 500 million litres of petroleum products from its imported cargoes into the market in a bid to halt the scarcity being experienced by people. Also reacting to the fuel scarcity problem, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) countered the claim by the Federal Govern-ment that the fuel situation was traceable to sabotage. The association said only a complete deregulation of the down stream petroleum sector would solve the problem. Obasanjo spoke when he received a delegation of the Manufacturer's Association of Nigeria (MAN) at the State House. The MAN delegation had come to inform the president that the distress in the manufacturing sector is becoming worse. Acoording to the president, "there is enough fact. This scarcity is just a temporary thing. By this weekend, Lagos, Ibadan, Abuja and other cities would have gotten over the problem." He said his administration would continue to do all within its powers to boost the productivity of local manufacturers. He further said that the Federal Government would continue to implement fiscal and monetary policies that would lead to a further reduction of interest rates charged by commercial banks in the country. "We will keep working to create an economic environment that allows the Central Bank to keep bringing down its Minimum Rediscount Rate (MRR)," Obasanjo said. The president however said that government expected that commercial banks in the country would keep to their commitment of ensuring that their rates never exceeded the MRR by more than four percentage points. He disclosed that his administration was considering the prohibition of the importation of more items which are being produced locally in order to boost industrial utilisation capacity within the country. "We all have to make sacrifices to put things right in this country and this administration is determined to do everything possible to get local production up," he said. He also assured the MAN delegation that the Federal Government would implement additional measures to ensure that raw materials and other legitimate imports are cleared expeditiously by Customs at Nigerian Ports. He added that the present administration has succeeded in achieving reasonable stability in the exchange rate of the naira. Obasanjo also told the delegation that the National Economic Council would look into the persisting problem of multiple levies which the manufactuers said were hampering the movement of their products across state boundaries. Lamenting the state of the manufacturing sector earlier, MAN President Charles Ugwuh, who submitted to the president, the association's input on how to manage the economy in the subsisting year 2003, said the nation is losing money in non-oil exports. The association noted that in spite of the administration's commitment to developing Small Medium Industries (SMEs) as a strategy of attacking poverty, unless access to funding is improved for this sector through the Bank of Industry, the growth of the economy will continue to be stalled. Ugwuh argued that "the recent intervention of Mr. President which led to reduction in interest rates to 22.5 per cent" and "a further reduction in MRR to 16.5 per cent recently implemented by the Central Bank of Nigeria (CBN), has however not elicited corresponding reduction in interest rates." The MAN president expressed the association's gratitude for the current campaign by the Federal Government "for patronage of Made-in-Nigeria goods as well as the directive issued on patronage and use of locally- made products in public offices." He added that "capital projects embarked upon by government currently have little or no component of local inputs outside labour." Corroborating the assurance by the president that the fuel crisis will end by weekend, a meeting between the NNPC and major marketers which held in Lagos yesterday also agreed to resolve the fuel scarcity problem immediately. According to a data made available to journalists at the end of the meeting, three vessels carrying a total of 65.32 million litres of imported fuel had berthed and were discharging at both the Atlas Cove and Apapa jetties. Another 405.23 million litres on board about 10 vessels are being expected in the country from next week. The Head of Marketers Operations Committee, Mr Obafemi Olawore, said that eight million litres of fuel had been delivered to stations around Lagos by mid-day yesterday, while a foreign vessel MT Beta, was already discharging another 13 million litres of fuel. "Between now and Monday, we are expecting three big vessels of 16,000 tonnes each or 20 million litres. By Sunday, the scarcity should be over," said Olawore. Also speaking to newsmen, the Apapa Terminal Manager of African Petroleum Plc, Mr Ibrahim Dikko, said the company had already loaded a 35 fuel trucks for delivery to its stations in Lagos. NNPC Group Managing Director, Mr Jackson Gaius-Obaseki said the meeting with the marketers was to end the fuel crisis. "We needed all of us to sit together to see how we can correct the situation," he said. Gaius-Obaseki reiterated his earlier claim that the shortage of refined petroleum products in the international market, due to the Venezuelan strike and the US-Iraq stand off, upturned the corporation's fuel import programme and created the scarcity. The strike in Venezuela, he said, saw the South American country gulping about 30 cargoes of refined oil in six weeks while many countries were also stock piling fuel for fear that the US war against Iraq may lead to scarcity. He said the situation raised prices, forcing importers to demand higher premium compared to what the NNPC was ready to offer. The NNPC chief however, added that while negotiations on this development was going on, the strike by workers of the Department of Petroleum Resources (DPR) precipitated the crisis. The Minister of Information and National Orientation, Profes-sor Jerry Gana on Wednesday blamed the cause of the fuel crisis on moves by some people to discredit the present administration. Gana linked the crisis to the DPR strike, which he said was engineered. But the umbrella body for senior workers in the oil industry, PENGASSAN, in a press statement signed by Comrades Sina Luwoye and Kenneth Narebor, President and General Secretary respectively, faulted any link of the DPR workers' strike to the present fuel scarcity in the country. PENGASSAN said it viewed Gana's statement "as an attempt to paint our association in a bad light considering the inconveniences the fuel scarcity has caused to millions of Nigerians." The union, which backed the DPR workers's strike, said the industrial action was to press the demands for the autonomy of the DPR, to request the National Assembly to pass the proposed bill on the setting up of the Independent Petroleum Inspec-torate Commissions and the payment of outstanding salaries and allowances. "The current scarcity of petroleum products in the country has nothing to do with the strike which had been suspended, and our members return to work at their different locations throughout the country," said the union. PENGASSAN said as a way out of the crisis, the Federal Government should ensure the following:

• That all depots in the country be made to operate throughout the weekend to make up for the current shortfalls until normalcy returns,
• That there should be supply intervention to all stations in major cities like Abuja, Lagos, Kano, Onitsha, Ibadan and other axial roads,
• That the NNPC should apply through the appropriate government department to the National Assembly for budgetary allocation in order to ensure adequate supply security between now and the forthcoming election. "The above measures can only assuage the fuel crisis for a short term, we foresee a situation where there will be a major crisis from June 2003 when cash backing subsidizing fuel import will be exhausted," warned PENGASSAN.