www.globeandmail.com By ROMA LUCIW Globe and Mail Update

Crude oil prices in New York shot up Thursday to touch levels not seen since the Persian Gulf war, fuelled by the prospect of a war in Iraq and a lingering winter cold snap boosting demand for gasoline and heating oil in North America.

With U.S. oil inventories sitting near a 28-year low and U.S. President George W. Bush pushing ahead with preparations to disarm Iraq — the Middle East's third-largest oil producer — by force, worries of a supply crunch sent prices sky-high, just shy of the $40 (U.S.) a barrel level.

Russell Sheldon, a senior economist with BMO Nesbitt Burns Inc. in Toronto, said that with oil inventories dangerously low, any disruption of oil supplies could send prices soaring further.

"There isn't [a scarcity] now but we are so close that people are beginning to hoard oil. The desire to get future supplies is extremely high," he told globeandmail.com.

Thursday's rally sent crude oil prices to a 12-year high. On the New York Mercantile Exchange, crude oil for April delivery jumped as high as $39.99 before profit-taking set in. It closed down 45 cents at $37.25 a barrel.

The $39.99 price is the highest since October, 1990, when Iraq's invasion of Kuwait sent crude oil price over the $41 level.

In London, Brent prices fell 2 cents to $33.05 a barrel, after setting a two-year high of $33.80. The larger spike in U.S. oil futures shows the effect of higher heating oil prices on underlying crude prices.

U.S. government data released Wednesday showed winter demand for distillates, including heating oil, have been running 20 per cent higher than in 2002, leaving stocks down 33 per cent on the year.

"The cold spell has helped generate the low inventories that make it so clear there is no buffer supply, leaving us vulnerable," Mr. Sheldon said.

On Thursday, the UN security council was busy debating a resolution that could trigger war on Iraq.

Despite news that Iraq may be willing to cooperate with some UN demands, the U.S. and the U.K. have insisted that military force is needed to disarm the country, which exports nearly two million barrels of oil a day.

Market watchers fear a war in the Middle East could also disrupt supplies from other oil-producing countries in the region.

"Nobody can assume that the war won't have a material effect on Middle Eastern supplies. Much more than just Iraq," Mr. Sheldon said, adding that the rising oil prices threaten the global economy.

"While it is not the only deciding factor, it is an urgent factor that will probably cause the U.S. and Britain not to want to wait long to start hostilities, if they are going to," he said.

A strike in Venezuela, a major oil supplier to the U.S., has also disrupted supplies.

Meanwhile, OPEC said Thursday it was confident it could cover any shortfalls of Iraqi oil during the situation of a war without consumer countries needing to dip into emergency reserves.

www.theage.com.au February 28 2003 By Rajat Bhattacharya Tokyo

Crude oil rose as much as 2.5 per cent to its highest price since Iraq occupied Kuwait in 1990, after the US Energy Department said the nation's inventories last week fell to their third-lowest level in at least 19 years.

Prices have jumped as much as 7.2 per cent in two days and 81 per cent in a year. US supplies are falling as it prepares for a possible attack against Iraq, saying the oil exporter still has not rid itself of weapons of mass destruction as it promised to do in the 1991 ceasefire that ended the Persian Gulf War. A strike in Venezuela also cut oil supplies.

"The supply situation in the US and parts of Asia is very, very dangerous," said Tetsu Emori, a commodity strategist at Mitsui Bussan Futures. "It's too easy for crude oil prices to reach $US45 ($A74) to $US50 per barrel once a war starts in Iraq."

Crude oil for April delivery rose as much as US94¢ to $US38.64 a barrel in after-hours electronic trading on the New York Mercantile Exchange yesterday - the highest intra-day price since October 1990. Yesterday in floor trading, oil rose 4.6 per cent, to $US37.70 - a 12-year closing high.

Venezuela and Iraq in November pumped about 7 per cent of the world's oil. US oil inventories fell one million barrels to 271.9 million barrels in the week ended February 21, down 14 per cent from a year earlier, the Energy Department said in a weekly report. The level is 0.8 per cent higher than the 269.8 million barrels on February 7, the lowest stockpile level since at least February 1984.

Supplies of distillate fuels, which include heating oil and diesel, dropped below 100 million barrels for the first time since May 2000, and gasoline stockpiles declined for the fourth time in five weeks.

Oil stocks in the Organisation for Economic Cooperation and Development region in December fell to 107 million barrels below the year-earlier level, the International Energy Agency reported earlier this month.

Bloomberg

money.cnn.com February 27, 2003: 8:59 AM EST

VIENNA (Reuters) - OPEC said Thursday it can cover any stoppage of Iraqi oil during war without the need for consumer countries to release emergency reserves even as crude prices hit a 12-year high.

Speaking as U.S. oil prices set a post-Gulf war high of $38.66 a barrel, cartel Secretary-General Alvaro Silva said: "This is not a problem of oil in the market, it is a problem of speculation."

"Yes, we are confident we can manage the situation given the level of production in Iraq," he said. "OPEC has been managing the case of Iraq for more than 10 years. We will try to alleviate the situation in the normal way and meet our commitment to stabilize the market," he told reporters at OPEC headquarters

U.S. light crude spiked $1.04 to $38.74 a barrel, the highest oil price since Iraq's invasion of Kuwait in 1990 when crude peaked at over $41. London Brent gained 66 cents to $33.52, near a two-year high.

A frigid winter in the U.S. also boosted demand for oil products, particularly heating oil.

"It's all down to a shortage of heating oil and natural gas in the United States, backed up by the prospect of war," said Christopher Bellew of brokers Prudential Bache in London.

OPEC's Silva said the producer group was already pumping beyond official output limits but could not stop speculators driving oil prices higher.

"We put 2.8 million barrels a day more in the market in December and January and you can see the result," he said of extra OPEC output.

Industrialized consumer nations, including the United States, have yet to decide whether or not they will release crude from emergency stockpiles, should the U.S. launch an attack against Baghdad. Spare cushion

Producers are hoping they can convince the Paris-based International Energy Agency, which controls the reserves, that a repeat of its 1991 Gulf War emergency drawdown will not be required.

The group says it has the capacity to fill any shortage from Iraq, as well as compensate for shortfalls from Venezuela, where a strike is in its 12th week.

It will want to avoid the IEA triggering sales from the huge reserves held among 26 member countries that include the U.S., Germany and Japan for fear the extra oil will cause a slump in prices after any war.

Silva said producers had another four million barrels a day of spare supply ready to call on, easily enough to cover Baghdad's 1.7 million bpd of exports.

Saudi Arabia already thought to be pumping nine million of its available 10.5 million bpd, independent experts put spare supply in the cartel at little more than two million.

OPEC meets March 11 and is expected to leave official supply quotas unchanged.

"Until now 24.5 million is enough, " said Silva of the official limit for 10 member countries.

Delegates have said OPEC may suspend quotas altogether during the period of any war, although Silva played down that possibility.

"It is not an issue of suspending quotas. The quotas have been functioning well," he said. "But of course in the case of catastrophe that's another question. Nobody knows the result of a war."  

www.channelnewsasia.com First created : 27 February 2003 2003 hrs (SST) 1203 hrs (GMT) Last modified : 27 February 2003 2220 hrs (SST) 1420 hrs (GMT)

OPEC said on Thursday it could cover any stoppage of Iraqi oil during war without the need for consumer countries to release emergency reserves.

OPEC Secretary-General Alvaro Silva said the group "won't use oil as a weapon" if war breaks out in Iraq.Advertisement "Yes, we are confident we can manage the situation given the level of production in Iraq," he told reporters at a news conference at OPEC headquarters.

"OPEC has been managing the case of Iraq for more than 10 years. We will try to alleviate the situation in the normal way and meet our commitment to stabilise the market."

Silva said the producer group was already pumping beyond official output limits but could not stop speculators driving oil prices higher.

Speaking as US oil prices set a post-Gulf war high of US$38.66 a barrel, he said: "This is not a problem of oil in the market, it is a problem of speculation."

"We put 2.8 million barrels a day more in the market in December and January and you can see the result," he said of extra OPEC output.

Industrialised consumer nations have yet to decide whether or not they will release crude from emergency stockpiles, should the United States launch an attack against Baghdad.

OPEC is hoping it has convinced the Paris-based International Energy Agency, which controls the reserves, that a repeat of its 1991 Gulf War emergency release will not be required.

OPEC says it has the capacity to fill any shortage from Iraq, as well as compensate for shortfalls from Venezuela, where a strike is in its 12th week.

Silva said OPEC had another four million barrels a day of spare supply ready to call on, easily enough to cover Baghdad's 1.7 million bpd of exports.

But with leading OPEC member Saudi Arabia already thought pumping nine million of its available 10.5 million bpd, independent experts put spare supply in the cartel at little more than two million.

OPEC meets on March 11 and is expected to leave official supply quotas unchanged.

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 6:12 PM ET Feb. 27, 2003

NEW YORK (CBS.MW) -- Crude futures soared toward a fresh 12-year high before easing back Thursday, as traders maintained a high degree of wariness over the latest developments regarding a possible war with Iraq.

Crude for April delivery traded as high as $39.99 a barrel, within hailing distance of the all-time high seen in the futures market -- $41.15, back in October 1990.

But traders calmed down by midday, with the April crude contract closing down 50 cents at $37.20 a barrel on the New York Mercantile Exchange.

"Once the psychological $40 barrier was not breached, this instigated traders to sell," said John Person, head financial analyst at Infinitybrokerage.com.

The market, having factored in as much negative news it could take, turned because it was "way overbought and all this market needed was a bit of good news to ... bring sellers in," he said.

Oil futures eased off their highs after U.S. officials lowered the nation's terror-alert level to "yellow" from "orange" -- reflecting the decreased threat of a terrorist attack on the nation.

Moreover, Egyptian media reported that Iraq might yet decide to destroy its al-Samoud 2 missiles, a move that would imply greater cooperation by Baghdad with U.N. weapons inspections.

Late Thursday, U.N. officials confirmed that Iraq agreed "in principle" to destroy the missiles, the Associated Press reported. Chief weapons inspector Hans Blix had given Iraq a March 1 deadline to at least begin destroying them.

Meanwhile, gold futures fell back to a more than one-week low on the back of that news. See Metals Stocks.

But several analysts said the lack of moonlight over Iraq this weekend could well raise the likelihood of an attack very soon.

Blix's scheduled testimony to the U.N. Security Council on Saturday "coincides with a new moon this weekend that provides cover for an invasion," said Peak Trading Group analyst Charles Nedoss. Also see Thom Calandra's StockWatch.

After an invasion, several issues will affect oil and gas prices.

"If prices are this high now, imagine where they may go if war drags out longer than three months," said Person.

"Supply disruptions from tankers in the Middle East may cease shipments as war develops for safety concerns," he said -- an important consideration in light of both recent declines in petroleum supplies and surging consumer demand both here and abroad.

Price scenarios

The immediate concern for traders in the event of a U.S.-led war against Iraq "will be the condition of the oil fields," said Todd Hultman, president of Dailyfutures.com.

There has been speculation that Iraqi leader Saddam Hussein plans to blow up the oil fields. Saddam denied those notions during a recent interview with CBS News. See more on this story.

If he does damage the fields, "you can expect crude prices to hit new record highs," said Hultman. But "if the oil fields stay untouched and the war progresses successfully for the U.S. in the first week, there could be heavy selling -- at least down to $28 per barrel."

Peak Trading Group analyst Michael Cavanaugh said a war "may not harm the actual supplies as much as expected, and a drastic spike followed by a downturn should be expected, with probably another upswing to follow."

Specifically, he believes the "onset of the war uncertainty and emotion would spark a huge rally" in oil. After that subsides, "traders will realize this emotional rally and profit taking will drive the market back down," said Cavanaugh. See Special Report: Countdown to War.

In the ensuing phase, he explained that the profit taking will become overdone and a new rally will set prices back above the $40 area "until the war is over and the chaos in the Middle East is brought down."

An interesting thing to note: exactly 12 years ago to the day, President Bush senior announced that the U.S. and its allies had successfully liberated Kuwait and defeated Iraq's army, the New York Times reported.

Tight supplies

Against a backdrop dominated by potential war, traders have been focusing in on oil supplies, which stand precariously at low levels.

U.S. inventories of crude stand around 271 million barrels -- near the 270 million barrels that the U.S. government sees as the minimum level at which refineries can continue to operate normally. The supplies are 16.3 percent below the year-ago level.

During the week ended Feb. 21, supplies fell by 1 million barrels, the Energy Department said Wednesday. The American Petroleum Institute reported a 3 million-barrel rise.

Meanwhile, distillate inventories fell for a sixth-straight week -- to a level not seen in nearly three years.

The Energy Department reported distillate inventories, which include heating oil, dropped by 4.5 million barrels, putting total supplies of 99.1 million barrels below the 100 million level for the first time since May 2000. They're now 25 percent below their year-ago level.

Separately, the API pegged the drawdown at 3.2 million barrels, to 103.8 million.

Gasoline inventories also declined last week, falling by 3.1 million to 208.1 million barrels and by 792,000 barrels to 209.9 million barrels, according to the respective readings by the API and the Energy Department.

On Thursday, March heating oil fell by 0.06 cent to $1.1543 a gallon, while March unleaded gasoline closed at $1.018 a gallon, down 0.03 cent.

Natural gas supplies drop

Natural gas for April delivery closed modestly higher, pressured by crude's weakness but coincidentally supported by a hefty draw in last week's U.S. supplies.

April natural gas closed at $7.485 per million British thermal units, up 9.5 cents on the session, following a dip to a $7.10 low. On Tuesday, the March contract rose as high as $10.50, moving past the previous record of $10.10 dating from December 2000.

"The rally in natural gas prices will continue given the weather forecast, which calls for more low temperatures, low storage levels and rising crude oil prices," said Economy.com energy economist Thorsten Fischer.

Early Thursday, the Energy Department reported the nation's supplies dropped by 154 billion cubic feet in the week as of Feb. 21.

Analysts at Fimat USA had been expecting a drawdown on the order of 138 billion cubic feet, while other market estimates called for bigger decreases. A year earlier, supplies fell by 73 billion cubic feet.

Supplies of natural gas are unusually tight. Total stocks of 1.014 trillion cubic feet are 948 billion cubic feet less than last year at this time and 508 billion below the five-year average, the government reported.

"Recent draws in storage, as well as continued cold temperatures, have led to upward pressures on natural gas prices," said Fischer.

High oil prices have also translated into greater demand for natural gas, he said, noting that the high oil prices drive users to switch to natural gas from petroleum-based fuels.

In the equities arena, most oil-service shares closed lower, with the Philadelphia Oil Service Index ($OSX: news, chart, profile) down 2.6 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at the 246 level, down 1 percent, on weakness in gold futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.