Oil Falls as US Says May Release Reserves

news.moneycentral.msn.com February 25, 2003 3:46:00 PM ET

NEW YORK (Reuters) - Volatile oil prices pulled back from two-year peaks on Tuesday after the United States said it would act quickly to release oil from strategic reserves if needed to offset any supply disruptions in the event of war with Iraq.

The remarks by Energy Secretary Spencer Abraham prompted a retreat from large gains triggered by huge demand for heating oil in the United States, where cold weather and low inventories have pumped fuel prices to record highs.

U.S. light crude for delivery in April fell 42 cents to $36.06 -- still some 70 percent above prices at the same time last year. London's Brent crude dropped 83 cents to $32.32 a barrel after earlier setting a fresh 27-month high at $33.94.

Abraham said the United States was ready to act quickly to release emergency oil reserves if necessary to offset any disruption to Middle East supplies -- which account for 40 percent of the world's oil exports -- in the event of war with Iraq.

He said Washington could release supplies on its own, but any decision would be made in consultation with Washington's partners in the International Energy Agency, the Paris-based energy watchdog for industrialized countries.

The IEA said earlier that the strategic reserves of its members would only be used as a last resort should war break out and producers fail to take up any supply shortfall.

Earlier, March U.S. heating oil prices surged to a record high of $1.18 a gallon and U.S. natural gas futures set all-time peaks as frigid conditions prevailed over the U.S. Northeast, stoking demand for heating fuels.

A 12-week strike in nearby Venezuela has run down U.S. oil inventories. U.S. stocks of distillates, which include heating oil, are running more than 30 percent below year-ago levels. Analysts predict further declines when the government releases its weekly fuel report on Wednesday.

Oil prices are expected to hold strong as traders remain reluctant to sell oil ahead of any attack on Iraq, which normally exports around 4 percent of internationally traded oil.

The United States, Britain and Spain submitted a new draft resolution to a polarized U.N. Security Council on Monday that said Iraq had missed a ``final opportunity'' to disarm peacefully and avoid war.

No vote is expected for two weeks, but the resolution opens an intensive period of diplomacy and its adoption would be a green light for war.

France and Germany have come out strongly against the U.S.-British draft and have circulated a rival proposal to the United Nations that would extend weapons inspections for at least four months. Russia and China back the French proposal.