Oil Prices Likely to Spike Upward Again

Oil prices are expected to rise today amid the confusing turn of events in Venezuela that have returned Hugo Chavez to power and clouded the future of a nation that is the world’s fourth-largest exporter of oil.

Oil prices rose sharply last week as Venezuelan labor unrest spread. Then they fell back just as sharply on Friday when Chavez was driven from power as traders bet that a new regime would bring stability and possibly even raise oil production above levels observed by Chavez.

Today’s oil trading, now that Chavez has returned to power after two days under arrest, could be just as volatile--and could remain so until the Venezuelan political scene stabilizes. Venezuela is the third-largest U.S. source of petroleum and refined products.

“I think the market’s going to go berserk,” said Michael Lynch, chief energy economist at DRI-WEFA, an energy consulting firm based in Lexington, Mass. He said prices could rise by $1 a barrel. On Friday, crude oil for May delivery fell to $23.47 a barrel on the New York Mercantile Exchange.

“The concern is this is still all in process, that there may be a counter counterrevolution.”

Mike Rothman, energy analyst at Merrill Lynch, agreed that the events will affect trading. “There will be a knee-jerk reaction; whether it’s massive or minuscule remains to be seen,” he said.

In his first day back in office on Sunday, Chavez made conciliatory moves toward the workers at Petroleos de Venezuela, or PDVSA, the state-owned oil company where labor unrest last week prompted a general strike, galvanized citizen discontent and helped drive him from power.

Chavez accepted the resignations Sunday of PDVSA President Gaston Parra and the entire board of directors, which Chavez had stacked with cronies in February. Those appointments, combined with firings of top PDVSA executives in recent weeks, helped trigger the strikes.

Chavez on Sunday also was said to be preparing to name Bernardo Alvarez, now vice minister of mines and energy, as new PDVSA president. Alvarez is generally well-perceived in the PDVSA ranks, sources said. A general meeting of employees has been set for today.

Despite the conciliatory gestures, analysts expect the political situation to remain uncertain, with continued labor strife and violence possible if Chavez fails to achieve reconciliation of opposing factions whose street clashes left a dozen or more people dead last week.

Chavez also might take a sterner hand in dealing with the oil company now that the failed coup has revealed his opponents’ lack of will, said one Caracas oil industry analyst, who asked not to be identified.

“We might have a few more weeks of uncertainty, people worrying that the company will go back on strike and production will go down again,” said Lynch of DRI-WEFA.

PDVSA output has been eroding over the last several months, due to Chavez’s custom of bleeding it dry of cash reserves that in past years had been spent on maintenance and on new drilling, Lynch said. A work slowdown called Operation Turtle also has hurt production.

Venezuelan officials said Friday that crude oil production had fallen from 2.5 million barrels a day to 1.4 million barrels. Lynch estimated that PDVSA’s current capacity--that is, its maximum output level--has shrunk by 1 million barrels a day to 2.5 million over the last six months because of reduced investment.

One of the reasons that prices fell on Friday is that market traders expected that a new president would abandon Chavez’s strict adherence to production quotas set by OPEC, to which it belongs, and instead resume what Lynch described as Venezuela’s “old cheating ways.”