www.forbes.com Reuters, 02.05.03, 12:56 PM ET

NEW YORK, Feb 5 (Reuters) - Emerging market sovereign bond prices traded slightly higher on Wednesday in a muted reaction to U.S. Secretary of State's Colin Powell's presentation to the United Nations in which he outlined the case for a possible war against Iraq. Benchmark Brazil C bonds <BRAZILC=RR> edged higher as Powell argued that Iraq had lied about its weapons programs while flouting U.N. demands that it disarm. "Most of us are still watching," said Mark Siegel, managing director at David L. Babson & Co., a member of the MassMutual Financial Group, explaining the lack of strong market reaction. "It remains to be seen how much of the risk that will come with the initiation of hostilities is priced in," Siegel said. "My guess is that the market will be shaken out of its complacency in the weeks to come and prices will go down." The market is concerned that a U.S.-led war against Iraq would jar the world financial system and spook investors away from risky assets, such as emerging market bonds. Emerging market bond spreads tightened by 10 basis points to 725 over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus. Tighter spreads reflect the perception of decreased risk as measured against safe-haven U.S. Treasury bonds. By early afternoon, C bonds had risen 3/8 to bid 69-1/4. While Powell played tapes and showed satellite pictures which he said proved that Iraq was concealing banned weapons, traders took a break from wondering about the policies of Brazil's new government, Venezuela's economically crippling oil sector strike and Argentina's financial recovery effort. "It's just Powell, for the moment," said Paul Masco, head of emerging market trading at Salomon Smith Barney. "It's the only thing going on today that matters."

www.rferl.org By Michael Lelyveld

As war worries rise, the Organization of Petroleum Exporting Countries is sending conflicting signals about raising or lowering output to anticipate world demand and keep prices in line. While consumers fear shortages, producers are already planning for a postwar price plunge, and Russia is struggling with huge unsold inventories of oil.

Boston, 5 February 2003 (RFE/RL) -- Less than a month after agreeing to raise oil output by 6.5 percent, the Organization of Petroleum Exporting Countries (OPEC) is already talking this week about possible cuts.

In a series of confusing signals over the last several days, the president of the OPEC oil cartel, Abdullah bin Hamad al-Attiyah, said the 11-nation group could speed up production or decide to reduce it in March.

Speaking in Abu Dhabi on 1 February, al-Attiyah said OPEC members could raise oil supplies further if needed, although there seems to be no worldwide shortage, the Qatar News Agency reported.

Then on 3 February, al-Attiyah said OPEC could move in the opposite direction at a meeting on 11 March to lower production, "Gulf News" reported. Analysts say that the coming of spring weather normally brings a drop in oil demand, while production in troubled Venezuela is gradually rising as a general strike there winds down. In such an uncertain environment, OPEC is worried that prices could plunge.

Al-Attiyah, who is the Qatari energy minister, said, "If we see any sign of a fall in oil prices, we will correct the situation." Some experts have warned that oil prices could slip suddenly to below $20 per barrel from more than $30 now.

Two weeks ago in Doha, al-Attiyah again gave a contradictory signal, saying OPEC could raise output at its scheduled March meeting. At the time, he complained that the market had ignored the cartel's decision on 12 January to hike production by 1.5 million barrels per day, leaving world prices too high. At the time, he said, "All options are open," AFP news agency reported. Since then, it appears that no option has been closed.

The reason is that both OPEC and the market are swamped with conflicting signals. Among them are a war with Iraq that may or may not happen, the strike in Venezuela that may be broken, and a dip in seasonal demand at a time when many countries are cramming to fill their strategic petroleum reserves. The combination of factors has made the market perilous to predict.

Analysts are also coming up with new combinations of possible outcomes within each variable, further complicating their forecasts. Most have to do with the dangers of Iraq.

This week, the Washington-based consulting firm PFC Energy outlined three possible outcomes for Iraqi oil production if a conflict breaks out in late February or March.

If the fighting ends quickly with no damage to the country's oil fields, Iraq could resume its recent production level of 2.5 million barrels of oil per day by May or June in the best case, PFC said. The "baseline case" includes some minor damage to oil facilities with recovery to prewar levels in November or December. But the worst case includes extensive damage, perhaps caused by mining of the oil fields, leaving Iraq with only 1 million barrels per day at the end of the year.

Others see the possibility of even worse consequences. Dow Jones Newswires quoted Mark Baxter, director of the Maguire Energy Institute in Houston, Texas, as saying that if Iraq attacks Kuwait, it would take a combined 5 million to 6 million barrels per day off the market, or 7 percent of world output. The range of possible outcomes makes any OPEC decision a matter of guesswork. In the past week, published forecasts have pegged future oil prices from as little as $10 to more than $80 per barrel.

The situation has also highlighted the problems for producing countries like Russia, which are highly dependent on oil income and less flexible than some OPEC members like Saudi Arabia. The output from Russia's Siberian oil fields cannot be easily turned on and off like those in the Persian Gulf.

Russian Finance Minister Aleksei Kudrin said the country's budget this year is based on the assumption that oil prices will average $21.50 per barrel, Interfax reported. On 1 February, Kudrin told reporters in Khanty-Mansiisk that he does not expect prices to fall sharply, but he did not explain his reasons for confidence.

Mikhail Khodorkovskii, president of Russia's giant Yukos oil company, disagrees, arguing last month that prices will soon sink to below $20 per barrel.

Khodorkovskii seems more worried about the prospect of low prices than he was a year ago, when Russian oil companies were ready to take on OPEC in a price war for world market share. At the end of 2001, oil was already trading below $20 per barrel and was fighting off threats to slide as low as $10. But Moscow's priority was to increase production, despite the low returns. It largely succeeded. Russia's oil output rose 9 percent last year.

One reason for Russia's greater worry over low oil prices is that it has yet to deal with the consequences of its success. In January, Russian oil output rose to a record post-Soviet high of 8.07 million barrels per day, but a backlog of oil on the domestic market is also rising toward record levels.

This week, LUKoil Vice President Leonid Fedun warned that bottlenecks and conflicts between private Russian oil companies and the state-controlled pipeline monopoly Transneft will trap up to 131 million barrels of oil inside Russia by November, "The New York Times" reported. The Moscow-based United Financial Group also estimated that Russian domestic oil inventories have already risen 14 percent to 165 million barrels in the past four months as prices plummet.

But Russia may also be less confident about weathering the worries over oil prices this time because it has far less control over events in the market than at this time last year. The outcome of real war is even less certain than a price war, and Russia's companies have already invested to produce even more oil.

reuters.com Wed February 5, 2003 09:35 AM ET By Barbara Lewis

LONDON (Reuters) - World oil prices climbed on Wednesday ahead of a key speech by Secretary of State Colin Powell aimed at convincing skeptics on the U.N. Security Council that crude producer Iraq is hiding weapons of mass destruction.

In London, benchmark Brent crude for March LCOc1 delivery rose 57 cents to $31.66 a barrel, while U.S. light crude CLc1 rose 52 cents to $34.10 a barrel.

"War is something that's very much inevitable," said Paul Bednarczyk, analyst at economic consultancy 4cast. "The market keeps trying to price that in and I think prices must be fairly near the top."

Prices had already climbed sharply on Wednesday as dealers began to anticipate that Powell's U.N. address would increase momentum for a U.S.-led war on Iraq, which traders fear could disrupt supplies not only from Iraq but from elsewhere in the oil-rich Middle East.

In a briefing, scheduled to start at 1530 GMT, Powell has pledged to provide "sober and compelling proof" that Iraq is concealing weapons of mass destruction.

FIVE TO MIDNIGHT

Many Security Council members want to give weapons inspectors more time to carry out their work in Iraq, but the United States has said Baghdad has weeks, not months, to give up suspected arms or face a U.S.-led military campaign.

Chief U.N. inspector Hans Blix has also said that time was running out. On Tuesday, he warned Iraq that it was "five minutes to midnight" and that Baghdad urgently needed to show it was cooperating with inspectors.

Blix, along with his colleague Mohamed ElBaradei, in charge of nuclear arms teams, will go to Baghdad on Saturday and Sunday at Iraq's invitation.

He will report back to the U.N. Security Council on February 14, possibly for the last time before a U.S. invasion.

Iraqi President Saddam Hussein, in a rare television interview broadcast on Tuesday, denied Baghdad had weapons of mass destruction or links to the al Qaeda network blamed for the September 11, 2001 attacks.

"There is only one truth, and therefore I tell you as I have said on many occasions before, that Iraq has no weapons of mass destruction," he said.

U.S. PRODUCTS STOCKS FALL

Analysts and dealers said that the market was also driven higher by data on Wednesday showing a steep drop in stocks of U.S. oil products as seasonal maintenance reduced output from U.S. refineries.

Overall crude stocks fell slightly, according to industry figures, but rose slightly, according to government statistics as a two-month-old strike in Venezuela, the world's fifth largest oil exporter, relinquished its stranglehold.

Venezuela's striking oil workers said on Tuesday crude output was 1.2 million barrels per day (bpd), although President Hugo Chavez, whom the strikers are trying to force to resign, said output was approaching two million bpd.

In January, the Organization of the Petroleum Exporting Countries (OPEC) agreed to increase output to help compensate for the effects of the Venezuelan strike.

But last weekend, OPEC ministers warned that as Venezuelan crude was coming back onstream, there could be a supply glut by the second quarter when demand traditionally drops off with the end of cold weather in the Northern Hemisphere.

Analysts also predict that the war premium built into prices will quickly melt away provided that any war against Iraq is short-lived.

A Reuters survey found on Wednesday that OPEC's January production rose 380,000 bpd from December to 25.65 million bpd, but remained 1.67 million below volumes in November, before the Venezuelan strike.

www.bday.co.za

LONDON - World oil prices surged on Wednesday as the market braced itself for US Secretary of State Colin Powell's address to the UN Security Council and the release of weekly data on US stockpiles.

The price of reference Brent North Sea crude oil for March delivery rallied 65 cents to $30.90 a barrel.

New York's benchmark light sweet crude March-dated futures rallied 69 cents to $33.45 a barrel on Tuesday and was expected to make further progress when trading resumed later.

"We've seen a strong performance yesterday (Tuesday) on Nymex products and there's been no let-up overnight," said Prudential Bache oil broker Tony Machacek.

Machacek said investors were cautious ahead of Powell's presentation which he is expected to use to disclose sensitive intelligence in an effort to dispel widespread doubts - both in the corridors of power and on the street - that Baghdad is flouting UN demands to disarm.

Analysts meanwhile said the market would also be keeping a close watch on US weekly oil inventory data released later.

GNI analyst Lawrence Eagles said the market was expecting a 1.5-million-barrel build in US crude stocks, offset by a 3.5-million-barrel draw in distillate stocks and a 1.7-million-barrel drop in gasoline stocks.

US stockpiles have fallen in recent weeks to their lowest level in around 27 years after a general strike crippled exports from Venezuela, a key supplier to the US marketplace.

Opponents of Venezuelan President Hugo Chavez on Sunday called an end to a 63-day general strike.

But analysts said that having opted to keep the strike in force against the state oil company, the market was still unsure when oil exports would return to normal levels.

Opposition leaders have accepted that production has risen to 1.2 million barrels a day, while Chavez has claimed production is running at 1.8 million barrels.

But even that figure is well below the pre-strike average of around 3.0 million barrels a day.

www.forbes.com Reuters, 02.05.03, 7:14 AM ET By Richard Mably

LONDON, Feb 5 (Reuters) - OPEC oil output edged higher in January as Saudi Arabia opened the taps to compensate for some of the shortage from strike-bound Venezuela, a Reuters survey found on Wednesday. January production rose 380,000 barrels a day from December to 25.65 million bpd but remained 1.67 million below volumes in November, before the Venezuelan strike, according to the survey of industry officials and monitors. Extra supplies from Saudi Arabia, the UAE, Nigeria and Iraq outweighed a further decline from Venezuela where rebel oilworkers kept a strangehold on exports in their bid to force President Hugo Chavez from office. While Caracas by the end of the month had restored output above a million barrels daily, average production was only 650,000 bpd, versus a million bpd in December and pre-strike November output of more than three million. Expectations are for a further gradual increase in February. Geneva-based consultancy Petrologistics is projecting 1.3 million bpd for the month. Saudi Arabia added 500,000 bpd to reach 8.55 million in January. Riyadh appeared ready to ratchet production higher but shipping and industry monitors said it had encountered difficulty in marketing any more. Saudi Oil Minister Ali al-Naimi has promised to keep world markets adequately supplied if a U.S.-led war on Iraq comes while Venezuelan output remains hamstrung. Petrologistics is projecting 8.67 from Saudi in February but with spare capacity stretched in most other OPEC members, the group looks likely to fall short of its new February target. Naimi said at the weekend that Riyadh aimed to keep flows from the 10 OPEC members with quotas, excluding Iraq, to the 24.5 million bpd limit that ministers introduced in mid-January. That target is not officially implemented until February 1 but, with Venezuela still way below par, the OPEC 10 in January remained a long way short of the target. They pumped 23.16 million bpd, up 290,000 bpd from December. Apart from Saudi, only the UAE and Nigeria were able to call on spare capacity to add any significant volume, rising by 50,000 bpd and 60,000 bpd respectively. Ironically, second only to Saudi in lifting output was Iraq, helping contain prices at about $33 a barrel for U.S. crude in the countdown towards what most in the oil industry see as an inevitable war. Baghdad's exports under the U.N. oil-for-food programme ran at 1.74 million bpd in January, up 90,000 bpd on the month. It pumps another 750,000 bpd for domestic use and border trade. With possible war only weeks away, the United States easily remains Iraq's biggest customer. Traders estimated Iraqi sales to the U.S. approached a million barrels daily, double last year's average as refiners sought to fill the gap from Venezuela. The Reuters survey seeks a best estimate of flows from OPEC countries based on the views of officials, industry monitors and analysts inside and outside member countries.