Oil Prices Rise as Strike Grips Venezuela

Oil prices rose as Venezuela’s worst labor strife in 30 years began to disrupt supplies from the fourth-largest exporter of crude to the U.S., highlighting the importance of the sometimes overlooked Latin country to the world market.

Benchmark crude prices rose 31 cents Wednesday to $26.13 a barrel in New York as Venezuela was paralyzed for a second day by a general strike called to protest the policies of President Hugo Chavez. Only Saudi Arabia, Canada and Mexico exported more oil to the United States last year.

Some analysts said this week that as much as half of Venezuelan crude shipments, which averaged 1.28 million barrels a day to the U.S. last year, have been lost to the strike.

The U.S. oil market, they said, could easily absorb such a loss for a short period, but prices would begin to spike if the interruption stretches out.

“We have solid reports of lack of loading and ships queuing up in Venezuela. There are more than 25 empty oil tankers lined up at various terminals around the country waiting for oil,” John Kingston, global oil director at Platts, a division of McGraw-Hill, said Wednesday.

Late Wednesday, labor leaders announced that the strike would continue indefinitely. It was unclear whether that would cut oil output even further.

Although Iraq’s suspension of oil shipments has grabbed most of the headlines in recent days, analysts said a disruption of Venezuelan crude poses a more direct threat to U.S. fuel supplies and prices.

“It takes 40 days for Mideast oil to reach the United States, whereas with Venezuela, Canada and Mexico, the lag is much shorter and so you feel the impact of an interruption a little quicker,” said Doug MacIntyre, a senior market analyst with the Energy Information Service, a unit of the U.S. Energy Department.

Oil workers, members of other unions and nonunion white-collar workers participated in the stoppage Tuesday and Wednesday that shut down about 80% of Petroleos de Venezuela, or PDVSA, as the state-owned oil company is known.

The government called in emergency workers Wednesday to boost production, but with unknown results.

Oil markets were relieved Tuesday when Saudi Arabia said it would make up for any loss of global supply caused by an Iraqi suspension.

But continued Venezuelan strife and the increasingly polarized political atmosphere there are making traders increasingly nervous.

Chavez has sought to politicize PDVSA by naming a leftist professor as president and five low-level employees, believed to be Chavez’s cronies, as board members, sources said.

The actions, they said, reverse a process during the 1990s when PDVSA was streamlined and made to operate more as an independent business.

Not only have Venezuelan oil shipments been cut in half, but gasoline shipments from Venezuelan refineries, which are especially important to East Coast wholesale markets, also have been hurt, sending wholesale prices up, said Adam Sieminski of Deutsche Bank in Baltimore.

El Palito refinery in central Venezuela, responsible for nearly 1 million barrels of gasoline a day, was forced to shut down Tuesday, with others slowing to a halt.

U.S. wholesale gasoline prices, which dipped dramatically after the Sept. 11 attacks, now are back up to about 84 cents a gallon, where they were during most of last year before the attacks, Sieminski said.

Oil analyst Michael Rothman of Merrill Lynch in New York said a big risk to global oil markets is the prospect of increasing political and labor disarray in Venezuela.

“There is some concern that the electric power industry might follow the PDVSA and white-collar workers into a strike, in which case things would become more complicated,” said Rothman, who added that he believes any disruption of Venezuelan oil supply will be short-lived.

The United States imports about 9.1 million barrels of crude a day, or roughly 45% of its consumption. Venezuela accounts for about 13% of U.S. imports.

Luis Giusti, a former head of PDVSA and now a senior advisor at the Center for Strategic and International Studies think tank in Washington, said the labor conditions at PDVSA have reached a low point as a result of Chavez’s reshuffling of management.

“The government has shown great contempt for the employees, it’s attacked them, threatened them, fired some executives, pushed others past the point of no return. So the employees have responded with what’s been called Operation Turtle. Everything is slowing down.”

Iraq had been exporting about 1.5million barrels a day to world customers, just a fraction of the 76million barrels of petroleum the world consumes daily.

But there is generally little margin for shortages, so any change in the supply chain can produce a wild price response that may seem out of proportion to the cause.

Mexico, also one of the top exporters to the U.S., is not an avenue the United States can turn to if Mideast or Venezuelan supplies get tight, since Mexico operates its oil wells at 100% capacity, Rothman said.

Despite Mideast jitters and the turmoil in Venezuela, analysts said odds are that oil prices are more likely to head down than up in coming days and weeks, given current market conditions.

Ed Morse, executive advisor of Hess Energy Trading Co. in New York, said current prices are significantly above historical averages and “that would indicate these prices are not sustainable.”

“We are at price levels that, if sustained, bring on investment, and that brings on new supply and that saturates the market and pulls down prices,” Morse said.

But Venezuela is something of a wild card that definitely has oil analysts’ attention, said MacIntyre of the Energy Information Administration.

“It’s certainly something to monitor, especially now that it’s the time of year when refineries start to run more crude to gear up for the summer driving season. Any disruption to a smooth flow could certainly provide a little jar to the system,” he said.

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Crude Cutback

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