Oil slips amid hope for short war - Crude futures reverse earlier gains as U.N. talks break down; reserve release talk spurs decline.

money.cnn.com March 17, 2003: 12:05 PM EST

LONDON (Reuters) - Oil prices slumped Monday despite the imminent threat of war on the world's seventh largest exporter Iraq, as dealers bet on a short conflict.

The possibility of the United States releasing oil from its huge emergency stockpiles also dampened prices, which began the day sharply higher with war fever.

Brent crude oil for May delivery fell 83 cents to $29.30 per barrel on London's International Petroleum Exchange, which was forced to close for two hours when anti-war protesters raided the London market waving banners saying "Oil fuels war." U.S. crude futures fell 68 cents to $34.70 per barrel, some $6 short of their peak during the 1990-1991 Gulf crisis.

"The market believes the war will be short and quick, so there should be a relatively soft landing for crude prices," said Charlie Luke at Aberdeen Asset Management.

Crude oil futures have risen 40 percent in four months as President Bush has stepped up his rhetoric against Baghdad. Bush was scheduled to make an address at 8 p.m. ET (0100 GMT Tuesday) in which he's expected to give Iraqi President Saddam Hussein a limited to leave his country in order to avoid war.

A cold winter and prolonged supply hitch from Venezuela have simultaneously drained commercial stockpiles to historical lows.

But markets have fallen 10 percent in the last week as traders prepared for a quick war that could see Iraq resuming exports within weeks.

"The market is betting on a short, straightforward campaign that would be over fairly quickly," said Steve Turner of Commerzbank in London.

"But there is definitely upside if the war is long and difficult and there are repercussions across the Middle East."

Iraq's U.N.-supervised oil exports, which recently averaged almost two million barrels daily, will slow to a trickle this week as dealers have already stopped buying for fear of an imminent attack.

Iraq's two authorized export terminals in Turkey and the Gulf were both idle Monday morning.

"Apparently, the banks do not believe there is sufficient time for a ship to load at Mina al-Bakr (in the Gulf) and get out before the bombs start dropping," said an industry source.

Iraq and its Gulf neighbors together pump about 40 percent of global crude exports. Forecast stretches to $46

Mike Rothman of Merrill Lynch said oil prices could exceed their Gulf War high of $41, pegging the upper end of his short-term forecast at $46 per barrel for U.S. crude, after reports that Baghdad has placed explosives at oilfields.

"The prospect for crude prices to spike up sharply even from current levels and, more importantly, how long prices stay elevated above the $25 figure we see as oil's 'center of gravity' rests largely on actual events impacting oil flows from the Persian Gulf," Rothman said.

The United States and its allies ended diplomatic efforts to win U.N. approval for an ultimatum to Iraq, clearing the way for them to launch war without Security Council authority.

The State Department has ordered non-essential diplomats and all embassy dependents out of Kuwait, Israel and Syria because of the threat of war, a notice mirroring precautions before the 1991 Gulf War.

Iraq denies possessing weapons of mass destruction and President Saddam Hussein vowed that Iraq would fight back "anywhere in the world" if invaded.

The Organization of the Petroleum Exporting Countries has pledged that it will fill any shortfall in supplies if war disrupts oil flows.