Oil Halts 4-Day Fall, Awaits War

reuters.com Tue March 18, 2003 11:34 PM ET

SINGAPORE (Reuters) - Oil prices rose on Wednesday, climbing after four days of steep losses that knocked more than 15 percent off a barrel of crude as traders awaited the outcome of a U.S.-led invasion of oil exporter Iraq.

U.S. light crude CLc1 climbed 63 cents to $32.30 a barrel following Tuesday's nine percent decline, which took prices to the lowest level in nine weeks.

London's Brent crude LCOc1 jumped 75 cents to $28.00 a barrel after dropping 7.6 percent in Tuesday's sell off.

Crude markets tumbled $5.50-$7 in the last four trading days as dealers bet on an easy U.S.-led victory over Iraq and minimal disruption to Middle East crude flows, which make up about 40 percent of global oil trade.

The 48-hour ultimatum, delivered late on Monday by President Bush to Iraqi leader Saddam Hussein, to leave Iraq or face war, pushed prices even lower with traders expecting a military strike in the next few days.

The U.S. deadline for Saddam to leave stands at 8:15 p.m. EST Wednesday.

Saddam rejected Bush's demand for him to go into exile and appeared on Iraqi television to declare his country was ready to repel any invasion that could start in less than 24 hours.

Baghdad denies U.S. allegations that it has built stocks of biological, chemical and nuclear weapons.

"The fall in crude indicates the market is looking beyond war. People are not expecting Saddam to have a scorch-earth policy. This is saying war is going to be short," said Han-Pin Hsi, oil and gas equities analyst at Deutsche Bank in Hong Kong.

UPSIDE RISKS REMAIN

Anticipation of a military strike in Iraq, which exports about two million barrels a day of crude, and possible wider disruptions to crude supplies from other Middle East producers, drove U.S. crude close to $40 in February, a whisker below the record of $41.15 set in the build up to the 1990-1991 Gulf War.

During the Gulf War, prices dropped from over $30 to barely $20 when U.S.-led forces launched their early 1991 offensive to expel Iraqi forces from Kuwait and it became clear Iraq would not harm oilfields in Saudi Arabia, the world's top exporter.

Analysts warned, however, that upside risks remained if Iraq should torch its own oilfields or if the conflict was drawn out.

"If the threat to blow up oilfields is carried out, we would see a savage spike to the upside. We would see sharp price rises probably out to two years forward," said Sydney-based independent oil analyst Simon Games-Thomas.

TEST OF OPEC'S LIMITS

An invasion would almost certainly close Iraqi crude output and southern neighbor, Kuwait, may also be forced to shut some fields near the border with Iraq.

Iraqi exports have already slowed substantially because international oil traders are unwilling to assume the risk on uncertain supplies.

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

Official figures due for release later on Wednesday are expected to show a slight increase of two million barrels in U.S. crude stocks, which are at lows not seen since the mid-1970s and below the 270-million barrel mark that the government considers the minimum for the smooth operation of U.S. refineries.

The OPEC oil cartel has pledged to fill any supply gap caused by war, but many members have already dramatically increased supplies this year and analysts believe any prolonged outage of Iraqi supply, with some impact on Kuwait, would test the group's spare capacity to the limit.

The United States, the world's top oil consumer, has made preparations to release some oil from its strategic reserves to prevent any supply interruption. But the signal to open the taps on these emergency stocks will come only when the government decides a shortage has developed.