Oil prices fall after ultimatum

edition.cnn.com Tuesday, March 18, 2003 Posted: 0634 GMT ( 2:34 PM HKT)

SINGAPORE (Reuters) -- Oil prices fell sharply Tuesday as U.S. President George W. Bush gave Iraqi leader Saddam Hussein 48 hours to leave Iraq or face an invasion.

Analysts said Bush's ultimatum, in a televised address to the American public, firmed up the timing of a possible attack and took away uncertainty in the market, which drove oil close to $40 a barrel in February, a level not seen since the Gulf War.

"Saddam Hussein and his sons must leave Iraq within 48 hours," Bush said. "Their failure to do so will result in military conflict, commenced at a time of our choosing."

U.S. light crude fell to a near six-week low at $33.80 a barrel, down $1.13 cents. London's Brent crude dropped 78 cents to $28.70 a barrel, the lowest level since early January.

"Bush has confirmed that the United States is 48 hours away from starting an invasion and that means that the end of uncertainty for the market is near. No market likes uncertainty," said David Thurtell at Commonwealth Bank in Sydney.

Expectations of a quick allied victory with little chance of major disruptions to crude supplies from other Middle East producers also helped cool oil prices, which gained 60 percent in just over three months from the beginning of December.

"The oil market is working on the basis there will be an overwhelming allied victory. The only surprise in the market is for that [victory] not to happen," said Sydney-based independent oil analyst Simon Games-Thomas.

Selling by speculative investors has driven crude down 10 percent in the last four trading days. Investors want to avoid being caught out by a sudden price slide if Middle East oil flows escape severe disruption.

In the first Gulf War, prices dropped from over $30 to barely $20 when the United States launched its January 1991 offensive as it became clear Iraq would not harm oilfields in Saudi Arabia, the world's biggest oil exporter.

The Middle East supplies about 40 percent of global crude exports.

Analysts warn, however, that the main risk to crude oil remains to the upside if Iraq should destroy its own oilfields or any war is difficult and drawn out.

Iraq near standstill An invasion would almost certainly close Iraqi crude output for a period and its southern neighbour, Kuwait, may also be forced to halt pumping at some fields close to its borders with Iraq. Kuwait pumps roughly two million barrels daily.

Iraq's U.N. supervised oil exports, which until recently were running at about two million barrels per day (bpd), have already slowed to a trickle with traders unwilling to take a risk on uncertain supplies due to war fears.

U.N. officials said on Monday exports would come to a standstill when U.N. staff are pulled out of the country, which could happen as early as Tuesday.

The OPEC producers' cartel has pledged to meet any supply gap stemming from hostilities, but a prolonged outage of Iraqi or Kuwaiti crude would test the group's spare capacity to the limit.

The United States, the world's biggest oil guzzler, has made preparations to release strategic oil reserves to prevent any interruption to deliveries if needed, said Republican Rep. Billy Tauzin, who is also chairman of the U.S. House Energy and Commerce Committee.

Analysts said confidence had grown that it was unlikely there would be any major supply crunch in the second quarter, which sees a seasonal downturn in oil demand with the end of winter.

"OPEC has been storing crude for some months and there is a significant amount of OPEC crude already on the water heading to western ports. Venezuela production looks to be increasing," said Games-Thomas.

"It looks like there could be a surplus of crude in the short term, if there's no serious damage to oil facilities during the war," he said.

Production in OPEC-member Venezuela, whose oil exports were slashed by an anti-government strike since December 2, continued to recover with government officials putting output near to three million bpd. Rebel oil workers say output is closer to two million bpd.