Oil prices fell heavily on Friday after Venezuelan President Hugo Chavez resigned under pressure from the military, reigniting oil market fears that the OPEC producer might revert to a policy of cheating on cartel output limits.

Staff at the Venezuelan state oil company ended a strike that hit exports this week and said they would resume normal supplies from the world's fourth largest exporter.

Brent blend crude for June ended down $1.44 in London at $23.19 a barrel. In New York, U.S. light crude slumped $1.68 to $23.31 a barrel, a five-week low.

Chavez was arrested by the military in the wake of a massive demonstration on Thursday when 15 people were killed by snipers that officers said were allies of Chavez. Businessman Pedro Carmona will lead a transition government before an election.

When Chavez came to power in 1999 he ensured the Latin American producer observed its OPEC output limit after years of quota cheating.

But the head of sales at state company Petroleos de Venezuela (PDVSA) said after Chavez's ousting that production should be set according to market conditions and not OPEC quotas.

"Let's not talk about quotas. Let's talk about the possibilities Venezuela has in the petroleum business," Edgar Paredes told reporters at a press conference.

"If we've got the resources and the market provides us with possibilities, we should take advantage of them."

Former Venezuelan Oil Minister Humberto Calderon Berti, an ally of Carmona's, said the next government might well abandon Chavez's strict application of OPEC quotas and recapture market share lost over his three-year tenure.

"I think policy will be changed. It will be orientated more toward capturing markets while maintaining ties in OPEC. Its going to be a policy of production expansion within OPEC in an orderly way," he told Reuters.

Chavez ordered a change in oil policy following the collapse of crude prices in 1998, caused in part by the previous Venezuelan government ignoring its OPEC quota. Caracas fell out with leading cartel power Saudi Arabia and oil slumped below $10 a barrel.

"With Chavez, Venezuela has been on the A team for OPEC," commented Peter Gignoux, head of the energy desk at Schroder Salomon Smith Barney.

A heavy slide in Venezuelan oil production capacity during the Chavez years might mean a new government will be unable to threaten any early repeat of pre-Chavez policy.

"They're not going to be a threat for some time because they have no spare capacity," said oil analyst Paul Horsnell of J.P. Morgan. "And in any case it's going to be expedient for any incoming government to cooperate with Saudi Arabia.

"Chavez rode a wave of popular support because of the oil price collapse of 1998-1999 after Saudi Arabia took on Venezuela. Venezuela was crushed by that and any new government is unlikely to make the same mistake."


Chavez came under pressure to quit after executives and workers at PDVSA began protests six weeks ago. The dispute widened this week with business and labor leaders backing an indefinite general strike. On Friday dissident PDVSA employees were heading back to work and pledged to return exports to normal.

"We are going to get PDVSA going as it normally does and that should be 100 percent starting Monday," said Luis Roja, President of PDVSA Gas.

Venezuela is the world's fourth largest oil exporter and a leading supplier to the United States. As much as 500,000 barrels a day of its 2.6 million bpd of crude output was cut by the strike and refinery operations severely curtailed. Last year Venezuela accounted for 13 percent of U.S. petroleum imports.

Crude prices now are sharply off Monday's $27 a barrel when Iraqi President Saddam Hussein announced a month-long ban on exports in protest at Israel's military incursions into Palestinian territories.

Baghdad said it would review policy after 30 days if Israel had not withdrawn its troops.

Leading OPEC supplier Saudi Arabia on Tuesday sent reassurances to the market, saying it would guarantee world crude deliveries. Financial speculators since have sold heavily to take profits from a $7 run-up in prices since the beginning of March.

Iraq pumps nearly two million barrels daily of exports on the 76 million bpd world market and accounts for about 10 percent of OPEC's 25 million bpd.

Dealers meanwhile were keeping an eye on Middle East developments as Secretary of State Colin Powell failed to secure any firm timetable from Israeli Prime Minister Ariel Sharon for an end to Israel's military offensive on the West Bank.

Israel maintained a tight grip on most of the West Bank's important cities, defying U.S. pressure to halt the offensive it launched two weeks ago after Palestinian suicide attacks.