Oil to rocket if war drags

www.news24.com 18/03/2003 22:58  - (SA)  

London - A recent sharp drop in oil prices ahead of a likely war with Iraq is based on shaky foundations, analysts said on Tuesday, warning that prices could rocket upwards again if the conflict drags on or oil facilities in the region are damaged.

The oil price in London has dropped by almost 10% since the start of the week, even falling below $27 per barrel briefly on Tuesday on the assumption of a short conflict.

The drop was precipitated by a series of announcements suggesting military action was imminent, prompting traders to start cashing in a "war premium" of between $2 and $6 a barrel factored in during recent diplomatic uncertainty.

But analysts said the plunge could be quickly reversed if the war does not follow US plans.

"If the war goes on for more than two or three weeks, then prices will shoot up again," said Manouchehr Takin, an expert with leading consultancy the Centre for Global Energy Studies (CGES).

While signs of a quick victory for US-led forces currently massed on Iraq's borders would trigger a further fall, this was not a foregone conclusion, he said.

"If the war drags on and on, placing a siege on Baghdad... that is really the scenario that could definitely cause the price to go up."

The price falls began on Monday afternoon when the White House announced that US President George W Bush was to address the nation that evening, following the end of diplomatic efforts to disarm Iraq without war.

Bush warned Iraqi leader Saddam Hussein that he and his family had 48 hours to leave the country for good or face invasion.

The oil price trajectory has been similar to that seen before the first Gulf War of 1991.

In October 1990, oil hit $41.15 per barrel - even more at today's prices - but the market slumped in January as a war to remove Iraqi forces from Kuwait grew nearer.

On the first day of US military action it plunged by almost seven dollars a barrel, eventually settling at $21.30.

However this time the size of any fall will be limited due to very different market conditions, said David Thomas, an analyst with Commerzbank.

"The fundamentals now are much stronger than they were 12 years ago. The possibility of a (price) collapse is going to be very much more muted than it was 12 years ago," he said.

The principal reason for this is the level of crude oil stocks, which were very high just before the 1991 conflict but are currently at a 27-year low in the United States after a strike in Venezuela crippled the country's oil exports.

And even if the market factors in a release of strategic oil reserves held by consumer nations and increased supplies arriving from producers, any dramatic news from the Gulf could have a massive impact, analysts said.

"Already there is this anti-American feeling all over the Middle East," said the CGES's Takin.

"There could be sabotage in the oil fields, in the export facilities of Saudi Arabia, Kuwait, the United Arab Emirates, and the oil flow would cease.

"These are the fears, because stocks are low," he said.

But for as long as the news remains positive for US and British forces, the price falls could well continue, said Orrin Middleton, an analyst with Barclays Capital.

"My guess is that it will keep going down for a while longer," he said.