Oil prices weaken on brink of Iraq war. `Market believes conflict will be short and quick'

www.thestar.com Mar. 18, 2003. 07:57 AM

NEW YORK—World oil prices eased further yesterday as dealers wagered that the looming war in Iraq would be short and inflict only limited damage on Middle East oil flows.

The possibility that the United States could release oil from its 600-million-barrel emergency oil stockpile further weighed on prices, which have fallen more than 8 per cent over the last three trading sessions.

"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.

U.S. light crude futures dropped 45 cents (U.S.) to $34.93 per barrel, down from a 12-year high of $39.99 late last month. The current price is $6 short of a $41.15 all-time peak during the 1990-91 Gulf War crisis.

Brent crude oil fell 65 cents to $29.48 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."

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

Speculative investors who fuelled a 60 per cent rise in oil prices in just over three months are now selling to avoid being caught out by a sudden price slide if Middle East oil flows escape severe disruption.

In the first Gulf War, prices sank from over $30 to barely $20 when the United States launched its January, 1991, offensive as it became clear that Iraq would not harm oil fields in Saudi Arabia.

But prices could go back up quickly if Iraq inflicted substantial damage on its own oil fields, or the war was prolonged, analysts said. Iraq and its Gulf neighbours together pump about 40 per cent of global crude exports.

U.S. plans to secure Iraq's northern Kirkuk oil fields quickly in the event of war have been undercut by Turkey's refusal to let U.S. troops through its territory.

"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."

A cold winter and prolonged supply hitch from Venezuela simultaneously drained commercial stockpiles to historic lows, and the OPEC oil cartel has little spare production capacity to cover further supply disruption.

U.S. gasoline pump prices already have hit a new all-time high of $1.719 a gallon for an average price of regular unleaded, the American Automobile Association said yesterday. A sustained increase in energy costs could weaken an already soft economy, analysts say.

Iraq's U.N.-supervised oil exports, which recently averaged almost 2 million barrels daily, will slow to a trickle this week as dealers have stopped buying for fear of an imminent attack.

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

Further pressuring prices, the chairman of the U.S. House energy and commerce committee said the energy department told him the Strategic Petroleum Reserve, or SPR, is ready to release oil to counter a disruption in crude supplies, if necessary.

"The SPR has, for some time now, transitioned from the fill' mode to the flow' mode and is prepared to flow upon orders from the president," Republican Billy Tauzin said in a letter to fellow lawmakers.

The United States and other members of the International Energy Agency has said it will allow OPEC oil producers to try to cover any shortages in war, releasing inventories from emergency stockpiles only as a last resort.

REUTERS news agency