World oil prices spiral downward - U.S. hints it will use force against Iraq regardless of U.N.
LONDON, March 14 — World oil prices spiraled down on Friday as the United States hinted it was prepared to use force against Iraq regardless of the U.N. and said it reserved the right to make a unilateral release of oil from its reserves in any supply emergency. The market was also encouraged by news that OPEC powerhouse Saudi Arabia had snapped up 14 tankers to move a massive 29.5 million barrels of crude oil to the U.S. Gulf for May delivery.
U.S. LIGHT CRUDE by 1800 GMT was off $1.11 at $34.90 a barrel, an eight percent fall in two days as a series of automatic sell stops were triggered on New York Mercantile Exchange futures. London Brent fell $1.28 to $31.15 a barrel an eight-week low.
U.S. Energy Secretary Spencer Abraham said on Friday Washington reserves the right to make a unilateral release of crude from the nation’s Strategic Petroleum Reserve. Abraham told reporters that while Washington would first consult with the Paris-based International Energy Agency (IEA), the energy adviser to 26 industrialized countries, a release need not be part of a coordinated drawdown. “We made it clear that we would engage in consultation as we belong to the IEA for a reason,” said Abraham. “But certainly the U.S. always reserves its right to make its own ultimate decision of what it’s going to do with our reserves.” Abraham was speaking after Japan said it was considering a unilateral release from emergency stocks in the event of war. Abraham repeated that OPEC producers would be given first chance at filling any supply disruption during war, before it considering releasing its emergency stocks. Thursday’s slump came after the United States and Britain pushed back until next week a deadline for a new U.N. resolution on Iraq and forecasts of warmer weather in the Northeast U.S. sent heating oil prices tumbling. Analysts said market perception seemed to be shifting towards the view that a war on Iraq, which traders believe is imminent and will be short, will be contained and not seriously affect oil flows from the Middle East as a whole, which supplies 40 percent of the world’s traded oil. “Last time in the 1991 Gulf War there was a big collapse when the shooting started and perhaps this time traders are getting in ahead of the game,” said Christopher Bellew, analyst at Prudential-Bache International.
Bush, allies plan emergency summit 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. The loss of roughly two million bpd of Iraqi crude would therefore not be as acutely felt. The United States says that it could go to war on Iraq without clear United Nations backing but Russia, Germany and France all refused on Friday to drop their opposition to rapid military action. U.S. 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. SAUDI SHIPMENTS The tankers booked by Saudi Arabian, to move 29.5 million barrels, represent additional spot tanker bookings over and above normal demand and term contracts. “It’s a huge volume, yes,” one broker said. The bookings made by Vela International Marine, state oil company Saudi Aramco’s chartering arm, indicate that its own large fleet is already fully employed. Oil traders said the volume shows Riyadh will keep supplies running high into May after a sharp increase in recent months to fill shortages from OPEC producer Venezuela and allay possible supply disruption fears ahead of a possible second Gulf War. Saudi Arabia has raised output by more than a million barrels per day since the start of the year and is likely to average more than nine million barrels per day in March of its 10.5 million bpd capacity. Brokers said 11 of the tankers booked to load between 27 April and 18 March had so far been confirmed. It takes up to five weeks to reach the United States from the Gulf. Some four other Very Large Crude Carriers representing some 1.12 million tons of crude, booked under Tankers’ International, were on subjects and had still to be confirmed by the charterer, brokers said. YAMANI WARNS OF $50 OIL Despite the short-term easing in oil prices, Saudi Sheikh Zaki Yamani, famed as the face of OPEC during the oil price shocks of the 1970s, warned on Friday a war on Iraq could drive oil above $50 a barrel and wreck the world economy. “If the absence (of Iraqi crude) is long enough and it can’t really be corrected and reduced by strategic reserves, prices can go to a very horrible ceiling and the price will be above $50,” the former Saudi oil minister told journalists on the sidelines of a seminar organized by his London-based thinktank, the Centre for Global Energy Studies (CGES). “It will ruin the world’s economy.”
U.S. oil prices surged to nearly $40 a barrel on fear that a U.S.-led war could disrupt Baghdad’s 1.7 million barrels per day (bpd) of exports, but have since calmed to around $34 after OPEC kingpin Saudi Arabia promised to make up any shortfall. Asked how much war premium was factored into prices, Yamani said: “You can’t really quantify.” But he added there were also fundamental reasons for current price strength, such as low U.S. oil inventories, which have fallen to a 27-year low. Yamani said prices would fall to less than $25 a barrel if any conflict were short and did not do any permanent damage to oilfields, but he doubted OPEC could make up in the short-term for any outage of Iraqi supplies. “With the absence of Iraqi crude from the market for some time, I don’t think OPEC will really stand up to the present offer to make up for the difference, especially if the Venezuelan problems are not solved quickly,” Yamani said. Asked later by journalists if that meant that the International Energy Agency (IEA) and its leading member the United States would have to tap into emergency stockpiles to meet demand, he said: “I hope so, I think they have to.” Both the Paris-based IEA and Washington have indicated a preference for OPEC to meet any shortfall on its own, although both remain ready to act swiftly should extra oil be needed. Among the worst case scenarios would be if Iraqi President Saddam Hussein set out to destroy Iraqi oil wells, something the Iraqi leader has denied he would do, though Yamani said he didn’t take Saddam’s denial very seriously. He cited research that because pressure in Iraq oil wells was low — in contrast with Kuwaiti wells torched by Saddam during the Gulf War — setting fire to them could destroy them for good. DEATH OF OPEC?
Playing now: • Consumer sentiment hits decade low • Saudi Arabia books extra oil tankers for U.S. • MasterCard seeks separate antitrust trial Provided, however, any war ended quickly and damage to oilfields was limited, prices could slump and the producers’ cartel, the Organization of the Petroleum Exporting Countries (OPEC) could lose its power. “OPEC has a lot of problems... OPEC has to reduce production in order to stabilize prices. To what extent can Saudi Arabia continue to reduce production I don’t know. OPEC has problems even without a war,” Yamani said. Should foreign investment pour into Iraq, production could soar, heralding an era of far cheaper oil. “Foreign oil companies injecting billions of dollars have to have a return on their investment, Iraq will produce without restriction,” Yamani said. CGES Executive Director Fadhil Chalabi went further saying a post-Saddam Iraq could emerge as “a super-giant oil producer and exporter,” leading the world oil supply map to be redrawn and transforming the international oil industry. Since the price shocks of the 1970s, there has been a shift away from the Gulf, where oil is cheapest to find and produce and to new areas where the development cost is higher, but supplies are seen as more secure. Opening up Iraq could reverse this, Chalabi said. In six-to-eight years, Iraq could reach production capacity of at least eight million barrels per day (bpd) from its present known recoverable reserves, estimated at 112 billion barrels. The CGES believes reserves could reach as much as 200 billion barrels. But Chalabi said Iraq’s oil, severely under exploited in the past, would only see rapid development with radical reform, including partial privatization of the nation’s oil industry.