An uncertain brew: threat of war adds a new and worrying element to volatile energy markets.

Publication: Buyside

Publication Date: 01-APR-03

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COPYRIGHT 2003 Adams Business Media

The oil and gas markets are tricky enough in the best of times. Raw materials may be in remote or politically unstable areas. Equity values are influenced by such factors as the tax and environmental policies of individual governments, the maneuverings of international cartels, and the success, or failure, of exploration efforts. Now the threat of war with Iraq adds new hurdles.

"Inventories are at 27-year lows effectively in crude oil. And they are just as tight in heating oil and natural gas. Every week we've seen substantial draws in heating oil," says Michael Armbruster, an analyst at brokerage Altavest.com.

Even without tensions with Iraq, there has been upward pressure on energy prices. A cold winter, particularly in the Northeast, pushed up consumption of heating oil and natural gas. And a bitter oil strike in Venezuela disrupted deliveries from a country that the U.S. had begun to look to as a safety valve against the uncertainties of the Middle East. Michael Fitzpatrick, an energy analyst at Fimat USA, says that the hedging activities of the large energy companies are also contributing to higher prices.

Phil Flynn, a senior commodities analyst at Alaron Trading, notes the susceptibility of the oil...

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