Iraq invasion could make oil prices plunge, analysts say

newsobserver.com Saturday, March 15, 2003 3:08PM EST By THE ASSOCIATED PRESS

LONDON (AP) - If U.S.-led forces invade Iraq, world oil prices will probably plunge from current levels and stay there - so long as the conflict ends quickly and causes little damage to production capacity in the Persian Gulf, several energy analysts said Friday.

However, a war that spills into neighboring countries or one in which Saddam Hussein sabotages his own oil fields could panic markets and trigger a spike in prices to $50 or even $60 a barrel, some said. The wide range of forecasts is a sign of the difficulty analysts face in trying to envision how markets will react to a war of unpredictable severity.

Fighting might be over in a few days, or it might erupt into a regional conflagration that affects crude exports from Kuwait and even Saudi Arabia. How OPEC and oil-importing countries respond to a war will also have a great influence on prices.

Perhaps the only certainty is that markets will welcome any move that keeps supplies flowing.

Crude prices fell Friday on reports that Saudi Arabia's state-run oil company Saudi Aramco had chartered supertankers to carry an exceptionally large shipment of crude - 28 million barrels - to the United States for delivery in May. April contracts of U.S. light, sweet crude tumbled by more than $2 a barrel in New York before rebounding somewhat to $34.90, down $1.11 from Thursday's close. In London, North Sea Brent crude futures were trading 98 cents lower at $31.45.

Analysts say that fears of a wartime disruption in supply have swollen crude prices by at least $5 a barrel. This so-called war premium has increased along with tensions in the Persian Gulf because markets worry that hostilities with Iraq will paralyze that country's 2 million barrels in daily oil shipments.

Although prices might rise in the last hours before any actual outbreak of hostilities, several analysts predicted that an attack on Iraq would knock the floor out from beneath the market - just as it did when coalition forces launched Operation Desert Storm on Jan. 16, 1991.

Futures contracts of U.S. light, sweet crude plummeted by $10.90 a barrel on Jan. 17, 1991 to close in New York at $21.30.

"History would suggest that oil prices would go down fairly rapidly, maybe $5-7 a barrel, probably within one day," said Angus McPhail, an analyst at ING Financial Markets in Edinburgh, Scotland.

He believes that markets will be awash in crude after a swift war, particularly if Venezuela continues to recover from an oil industry strike and other members of the Organization of Petroleum Exporting Countries keep busting their output quotas. For the second half of the year, ING Financial Markets foresees an average Brent crude price of $18.50 a barrel.

"We are adamant that oil prices will fall," McPhail said.

Matthew Cordaro, an energy specialist at Long Island University, in Brookville, N.Y., argued that U.S. crude prices would fall to $25-28 a barrel "within a couple of days" of the start of a war.

Prices might fall by an additional $2 a barrel beyond that, Cordaro said, if President Bush authorizes a release of crude from the U.S. Strategic Petroleum Reserve, or SPR.

U.S. Energy Secretary Spencer Abraham has repeatedly emphasized that the United States will tap into its 600 million barrels of strategic reserves only if it sees a serious disruption in crude supplies. A short war that didn't impair Iraq's ability to soon resume exporting oil would probably not warrant a release of SPR oil, Cordaro said.

The first line of defense for importing countries in the event of a war would be an increase in OPEC oil production. OPEC this week estimated its spare production capacity at 2-4 million barrels a day, but the International Energy Agency said that OPEC might not be able to raise output quickly by more than 1 million barrels. The agency is the energy watchdog for major consuming countries.

Adam Sieminski, an oil price strategist at Deutsche Bank in London, argued that the Bush administration would most likely tap into U.S. strategic reserves in a war. If not, he said, "Bush will win the war but lose the 2004 election."

With no SPR oil, Sieminski said it was impossible to predict how high prices could go.

"Who knows? It's going to be much higher than it is now, with consequent damage to the world economy," he said.

In a worst-case scenario, a wider war could inflame regional hostility to the United States and lead to another Arab oil embargo. Prices might then spike to as much as $60 a barrel, said Rob Laughlin, managing director of London brokerage GNI Man Financial.

Former Saudi Arabian oil minister Sheikh Zaki Yamani agreed, telling an industry conference Friday that prices could exceed $50 a barrel if supplies from neighboring countries such as Kuwait and Saudi Arabia were interrupted.

However, Yamani said that a short and successful war against Iraq could push prices to under $25 a barrel.