Oil Prices Fall to Three-Week Low

reuters.com Fri March 14, 2003 02:18 AM ET

SINGAPORE (Reuters) - U.S. oil prices fell to a three-week low on Friday as the United States continued to try to garner U.N. support to use force to disarm Iraq, saying it might keep trying until next week or scrap a new resolution.

U.S. light crude fell to $35.32 a barrel, the lowest level since February 21. It later recovered to $35.80, 21 cents below the New York close on Thursday.

London's Brent crude dropped 40 cents to $32.03 a barrel, an 11-day low.

"In risk terms, I see another $1 or so of weakness, while I maintain around $12 potential upside risk," said Sydney-based independent oil analyst Simon Games-Thomas.

Volatile oil markets fell $1.50 to $2.00 a barrel on Thursday after the United States said diplomatic efforts to secure a consensus at the U.N. Security Council on a new resolution authorizing military force against Iraq could go into next week.

Bullish comments from U.S. officials earlier this week pointed to Washington forcing a vote at the Council by the weekend, potentially bringing the threat of war a step closer.

Crude had climbed some 30 percent this year to almost $40 a barrel and close to a record high at $41.15 struck in October 1990 in the build-up to the 1990-1991 Gulf War.

Traders worry that an invasion of Iraq, which itself ships around four percent of world oil exports, could upset supplies from other producers in the Middle East.

Secretary of State Colin Powell told a congressional committee there might be no vote at all on the resolution, widely seen as a war trigger -- a sign that Washington fears it might not get enough support at the international body.

Washington, backed by Spain and Britain, has met strong opposition from France and Russia, which have threatened to veto any vote at the Security Council that could lead to war.

WARMER WEATHER

Further relief for soaring prices came from an end to freezing U.S. temperatures that have supported heating oil prices at near record levels in recent weeks as fuel stocks in the world's biggest consumer have fallen to 27-year lows.

The Organization of the Petroleum Exporting Countries has cranked up output this year to cover an outage of crude from Venezuela, where an anti-government strike brought production to little more than a trickle in December and January.

Venezuela, normally the fifth-biggest exporter providing about 13 percent of U.S. oil imports, has increased shipments of crude and oil products though rebel oil workers say production is still less than half of normal levels.

Analysts say timing is now key for the war because oil demand is generally two million barrels per day (bpd) lower in the second quarter of the year as spring advances and the loss of roughly two million bpd of Iraqi crude would not be as acutely felt.

Boston-based Energy Security Analysis (ESAI) said it expected to see some strong signals from supply/demand fundamentals "even through the fog of war."

"Indeed, ESAI projections are beginning to indicate a sizeable crude oil surplus even with a forecasted reduction in Iraqi output," ESAI managing director Sarah Emerson said.

"The increase in Saudi output coupled with recovering Venezuelan output has inflated OPEC output just as European refinery maintenance is getting underway and just before Asian crude oil purchasing will drop off seasonally," ESAI said.

OPEC has pledged to guarantee supplies should war break out and Saudi Oil Minister Ali al-Naimi reiterated on Thursday OPEC's ability to deliver oil in case of war in Iraq.

OPEC wants to avoid any repeat of the 1991 Gulf War when industrialized nations released emergency oil stocks timed to coincide with the start of the allied bombing campaign against Iraq, which caused crude to plunge $10 in a single day.

The International Energy Agency, the West's energy watchdog, has said that it would allow OPEC to try to cover any shortages in war before it considers, as a last resort, releasing inventories from emergency stockpiles held in consumer nations.