Volatile oil market bounces at $40 per barrel

news.ft.com By Carola Hoyos Published: February 27 2003 19:29 | Last Updated: February 27 2003 22:58

Crude oil prices surged on Thursday to almost $40 a barrel in New York, a high not seen since just after Iraq invaded Kuwait in 1990. The $2 jump was fueled by concerns over a lack of US oil supplies ahead of an increasingly inevitable war with Iraq.

The jump, which affected the US benchmark West Texas Intermediate contract far more than its Brent Light London counterpart, proved short-lived, however, with prices retreating to the $37 range by the early-afternoon. One trader described the morning session as one of the “wildest rides” the energy futures market had seen in years.

Commercial stockpiles of US crude oil are smaller than they have been since 1976 and in the past week fell to the minimum 270m barrels needed to keep the US’s vast system of refineries, pipelines and storage tanks running smoothly.

Meanwhile, a cold winter gripping the US Northeast has cut stored heating oil to dangerously low levels, more than 30 per cent below the inventories available last year.

Washington has tried in vain to calm the recent jitters in the oil market by announcing that it would consider in case of a war with Iraq to release some of the 600m barrels of crude oil it stores for emergencies.

The Opec oil cartel has also tried to reassure markets, raising its output quota in January and promising to use spare capacity to cover a possible reduction of 2m barrel a day from Iraqi exports in the event of US military action in Iraq.

But the world faces supply interruptions not only from the Middle East.

George Beranek, analyst at PFC Energy, a consulting firm in Washington, says: “Invetories are low enough that the market really is working without a safety net, particularly in the US. If you have renewed problem in Venezuela or problems in  Nigeria in the run up to their April presidential elections, then you are going to have a serious problem very quickly.”     

The effect of the high oil price on the world economy will largely depend on the length of time it continues at current levels. For many countries, a major mitigating factor has been the recent drop in the value of the dollar, the currency in which oil is traded.   

“The real problem comes if these problems last a long time. One month should not be a problem, three months will have an impact in developing economies and 6-12 months it could be serious,” Mr Beranek says.

On the down side, the release of extra Opec crude and stockpiles held in storage in Europe, Japan and the US could also swamp the market. Prices could drop to well below $20 a barrel if a short war in Iraq causes little damage to the country’s oil fields and the worries about oil supply interruptions in countries such as Venezuela and Nigeria prove unfounded.