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The Washington Post: Cold Weather, Weakening Dollar Push Crude Oil Prices Higher

From Wire Service Reports
Saturday, January 10, 2004; Page E01

Oil prices climbed well above $34 a barrel on Friday as traders responded to colder weather in the Northeast and the high cost of natural gas. The weak dollar also is pushing energy prices higher, analysts said.

"It gives OPEC countries less buying power and literally no incentive to make any increases in output" of crude, which is denominated in dollars, said Tom Bentz, an analyst at BNP Paribas Commodity Futures in New York.

Crude oil for February delivery traded above $34.55 yesterday on the New York Mercantile Exchange and closed at $34.31. The front-month oil futures contract has not closed above $34 since March 17, just a few days before the invasion of Iraq.

The nation's commercially available inventory of crude is 3 percent below last year's levels. For the week ending Jan. 2, commercial supplies stood at 269.0 million barrels, down from 277.5 million barrels a year earlier.

Still, Bentz said supplies of heating oil and natural gas are ample.

On Jan. 2, commercially available supplies of distillate fuel, which includes heating oil, were 300,000 barrels above the five-year average at 135.5 million barrels. Commercial inventories of natural gas, meanwhile, stood at 2.6 trillion cubic feet for the week ended Jan. 2, or 8 percent above the five-year average for this time of year.

Despite the fact that inventories are up about 10 percent from last year, prices have been hovering at very high levels since Thanksgiving. Analysts said they were surprised when prices first began to rise quickly in late November, and that they remain hard-pressed to find any supply data that substantiates these levels.

Natural gas for February delivery closed at $7.30 per thousand cubic feet yesterday on Nymex.

"I personally don't believe we should be up at these levels," Bentz said, noting that traders have ignored recent fuel-inventory reports that were bearish and focused instead on bullish factors such as the cold weather and the weak dollar. "When it's cold, the market does tend to have an upward bias," he said.

Because some users of natural gas can switch to fuels derived from oil when prices are high, price trends for one can affect the other.

Also yesterday, Royal Dutch/Shell Group, one of the world's largest oil companies, cut its estimate of proved oil and gas reserves by 20 percent and failed for a third year to find as much oil as it pumped. The shares fell as much as 8.5 percent.

The disclosure is a blow to confidence in Chairman Philip Watts and increases investor concern about growth at Shell's exploration division, its most profitable unit. In October, Shell said it will miss its production target for 2003. The drop in Shell shares today is the biggest since July 2002.

Shell's proven reserves at the end of 2002 were 15.5 billion barrels, not the 19.4 billion stated earlier, spokesman Simon Henry said. The 3.9 billion-barrel difference still has "scope for recovery" and may ultimately be produced, Shell said. London-based Shell said it replaced 70 percent to 90 percent of 2003's output, signaling reserves may fall further.

The U.S. Securities and Exchange Commission has asked oil companies to review their assessment of reserves in the U.S. Gulf of Mexico, Henry said. The request was unrelated to Shell's review, which was triggered by studies done in the fourth quarter. Last year, BP Plc reduced its estimate of reserves in a Russian joint venture because of a change in SEC rules.

The changes came because Shell is using a "tighter" definition of reserves, Shell's Henry, head of investor relations, said on a conference call. Watts and other executives, such as Chief Financial Officer Judy Boynton, were not on the call.

In some cases, the reserves are no longer considered to be proven because development plans have changed, Henry said.

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