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Oil Prices Surge on Short Supplies

OPEC ministers decide to keep production steady through July but leave open the possibility of cuts.

June 12, 2003|From Associated Press

Oil prices surged above $32 a barrel for the first time since mid-March on Wednesday as traders fretted about scant supplies, the rising price of natural gas and a signal from OPEC that production cuts might be on the horizon.

The weak dollar also is making it more expensive to buy oil, analysts said.

Crude for July delivery finished up 63 cents to $32.36 on the New York Mercantile Exchange. The last time Nymex oil futures closed higher than $32 a barrel was March 17, a few days before the start of the war in Iraq. Prices then fell sharply after U.S.-led forces quickly secured Iraq's most abundant oil fields and analysts speculated that the country's supply would make up for lost production elsewhere.

As the military conflict wound down, crude futures dropped as low as $25.24 on April 29. But prices have risen steadily since then as it became clear that Iraq's oil industry was in bad shape and that the country's crude would not flood the global market anytime soon.

"The market is starting to wake up to the fact that while Iraq is going to be a big deal down the road, near term it isn't going to be much" of a contributor to world supplies, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Iraq, which pumped about 2.1 million barrels a day before the war, now is producing fewer than 1 million barrels a day.

On the domestic front, the Energy Department reported Wednesday that commercial inventories of crude fell last week by 4.6 million barrels to 284.4 million barrels. That is 12% below year-earlier levels.

Refiners are drawing down crude inventories to meet the nation's gasoline needs at the start of the busy summer driving season.

Supplies already were low because of a two-month strike that paralyzed oil production in Venezuela, the world's fifth-largest petroleum exporter.

Flynn also cited the rising price of natural gas, a problem that was highlighted before Congress on Tuesday by Federal Reserve Chairman Alan Greenspan. Greenspan warned that high natural gas prices could be a drag on the economy, particularly in the manufacturing sector.

With natural gas futures trading higher than $6 per 1,000 cubic feet, or about double what they were a year ago, manufacturers are choosing to run their plants on crude-derived fuels instead of natural gas, and that too is driving the price of oil higher.

The Organization of the Petroleum Exporting Countries offered little relief to the market Wednesday, when ministers meeting in Doha, Qatar, decided to keep production levels steady through July.

The oil cartel left open the possibility of a production cut at its next meeting July 31.

Fahnestock & Co. oil analyst Fadel Gheit said that although OPEC ministers publicly expressed fears about the potential for an oil glut once Iraqi production reaches prewar levels, privately they were "laughing all the way to the bank."

Still, he said speculation by U.S. traders was driving prices higher more than anything else. "It's not because there is a physical shortage," he said. "It's all psychology."

Cartel President Abdullah ibn Hamad al Attiyah, who is Qatar's oil minister, said OPEC would reassess the effect of Iraq's postwar return to the market at the July 31 meeting.

"Then we will have some options, either to cut production or not," Attiyah said. "That is what we need to decide."

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