Traders looking past war - Oil falls on hope for a new Iraq
www.chron.com March 19, 2003, 12:59PM By MICHAEL DAVIS Copyright 2003 Houston Chronicle
RESOURCES • Graphic: Oil prices fallOil prices plunged Tuesday as the "war premium" was stripped from prices and investors began to look ahead to Iraqi oil returning to the market under new leadership.
They began falling in earnest Monday ahead of President Bush's ultimatum to Saddam Hussein, which could lead to war by tonight.
Since oil peaked at near $40 a barrel early this month, it has slipped over the past week back toward $30 per barrel.
Light, sweet crude oil for April delivery fell $3.26, or 9.3 percent, to $31.67 a barrel on the New York Mercantile Exchange.
It was the steepest one-day decline for the near-month contract since Nov. 15, 2001, when OPEC and Russia were fighting over production cuts the cartel was using, trying to rein in Russian production.
The drop is reminiscent of the free-fall in prices at the beginning of hostilities in the Persian Gulf War in 1991. In one day, prices dropped around $10 per barrel after it became apparent that the conflict would not last long.
This time, however, prices are not expected to plunge to the $20-a-barrel level that occurred in the last war.
Historically, the market has been able to adapt to such conflicts.
When Iraq invaded Kuwait in August 1990, prices spiked up, but by the time the war began in January, the oil markets had made up for the lost output, said George Beranek, manager of market analysis for PFC Energy, a Washington energy consulting firm.
"In 1991, the rest of OPEC was able to increase production enough that the markets cooled off substantially," Beranek said.
There is not nearly the same amount of excess capacity in OPEC now compared with 12 years ago.
Most members are producing flat-out, except for Saudi Arabia, which has already offered assurances that it can make up any shortfall of Iraqi oil in the near term.
Inventories are at a bare minimum after a cold winter that pushed up fuel oil demand and a near cutoff of exports from Venezuela after a strike by oil workers.
While Venezuela is slowly rebuilding its exports, Iraq is no longer in the market. Iraq's two authorized export terminals in Turkey and the Persian Gulf are idle. All exports under the oil-for-food program have been halted, with the departure of U.N. officials.
Iraq has been producing about 2.5 million barrels per day of which about 1.8 million was until recently exported under the United Nations oil-for-food program. Iraq was smuggling out about 200,000 barrels per day as well.
This is less than during the Persian Gulf War in 1991, when about 4 million barrels of Iraqi and Kuwaiti oil came off the market for about five months.
But experts say the world oil markets have changed since then, complicating comparisons.
On the negative side, U.S. inventories have been hovering around record low levels.
A big plus now is that oil markets are more integrated and closely linked than 13 years ago, said Dennis O'Brien, director of the Institute of Energy Economics and Policy at the University of Oklahoma.
"When Iraq's and Kuwait's oil came off the market, people had to search around for other crudes, which is always a kind of irregular, worrisome process," O'Brien said.
By the time the war actually started, the 4 million barrels had been replaced, but they were replaced by grades of crude that did not always fit the needs of users.
"In 1990, we were just beginning to see an efficient globalized market and the Gulf War accelerated that process; a lot of areas that had not been linked became linked," O'Brien said. "Today's market is far more efficient, and we will not have as hard of a time finding crude to fill in."
Saudi Arabia issued a statement a few hours before President Bush's speech Monday night, saying it is undertaking "significant actions" to ensure the world's oil supply does not run short in the event of military action in Iraq.
Saudi Oil Minister Ali al-Naimi stated, "We will make sure there is enough oil in the market. We have plenty of spare capacity."
Saudi Arabia has taken actions to increase production and store oil supplies. In the event of any market disruptions, al-Naimi said, "we are confident that OPEC in general and Saudi Arabia in particular will deliver."
U.S. Energy Secretary Spencer Abraham has pledged to tap the 600-million barrel Strategic Petroleum Reserve, holding enough oil to cover about 272 days of U.S. imports, if a war begins. The administration during the Gulf War offered to allow refiners to tap into the nation's stockpile of oil reserves, but it was not necessary to do so.
As traders sold off oil Tuesday, analysts began hashing out what challenges a post-Saddam Iraq oil industry will face.
"There are going to be technical obstacles, such as deciding which facilities need to be repaired and who is going to pay for those repairs," said Amy Jaffe, senior policy analyst with Rice University's James A. Baker III Institute for Public Policy.
There is also the matter of contracts that have been struck with Iraq under Saddam and whether those would be enforceable under a new administration.
Estimates are that Iraq could boost its production to 6 million barrels per day, but historically, oil production has not risen in countries after such a change, Jaffe said.
Still, Iraq has huge reserves, second only to Saudi Arabia, and it has only exploited a few of its large discoveries. The Kirkuk Field, discovered in 1927, is still one of its most prolific.
"Iraq has the capacity to reach 6 million barrels per day -- but not until 2012," said Martin Purvis with consultants Wood Mackenzie. "Twenty years of war and sanctions have severely limited its export capacity as well."
Tuesday's decline in oil prices also drove down wholesale prices for gasoline and heating oil. Heating oil for April delivery fell 5.79 cents to close at 85.78 cents a barrel, while gasoline futures dropped 6.52 cents to close at 96.19 cents a gallon. Natural gas fell 16.8 cents to $5.339 per thousand cubic feet.
On London's International Petroleum Exchange, Brent crude from the North Sea closed at $27.75 per barrel, down $2.23.