Oil Steady After 4-Day Rout, on War Alert

asia.reuters.com Wed March 19, 2003 09:13 AM ET By Tom Ashby

LONDON (Reuters) - World oil prices steadied on Wednesday after a four-day rout that knocked 18 percent off the cost of a barrel, as dealers braced for an imminent U.S. invasion of Iraq.

International benchmark Brent crude oil rebounded by 48 cents, or 1.8 percent, to $27.73 a barrel by early afternoon in London, having fallen eight percent on Tuesday.

U.S. crude futures climbed 24 cents to $31.91, following Tuesday's nine-percent drop which took prices to their lowest level in nine weeks.

"The market seems to have achieved some stability after the sharp sell-off," said Christopher Bellew, a broker at Prudential-Bache International.

"Prices are unlikely to move far from these levels until war starts."

Brent has tumbled $7, or 18 percent, in the last four trading days as uncertainty over an attack lifted and dealers bet on an easy U.S. victory. They also expect only a brief disruption to Middle East exports, which make up 40 percent of global oil trade.

Kuwaiti sources said U.S.-led troops had already moved into the demilitarized zone that straddles the border with Iraq.

The U.S. deadline for Iraqi President Saddam Hussein to quit Baghdad or face war stands at 0115 GMT on Thursday, but Saddam has already rejected the ultimatum.

All international U.N. staff, including weapons inspectors, have been evacuated from Iraq.

FEAR PREMIUM

Dealers said the four days of falls had removed some of the "fear premium" in oil prices. Saudi Oil Minister Ali al-Naimi said in an interview published on Wednesday it could be as large as $10.

"The fall indicates the market is looking beyond war. People are not expecting Saddam to have a scorched-earth policy," said Han-Pin Hsi at Deutsche Bank in Hong Kong.

Fears of a strike on Iraq and wider disruptions to Gulf supplies drove U.S. crude close to $40 last month, approaching the $41.15 record set in the buildup to the 1991 Gulf War.

During that war, prices dropped from over $30 to $20 when U.S.-led forces launched an offensive to expel Iraq from Kuwait, once it became clear Iraq would not harm oilfields in Saudi Arabia, the world's top exporter.

"If there is an early U.S. victory, I don't expect any major price increases, and it could fall further," Prudential-Bache's Bellew said.

Upside risks remain, however, if Iraq should torch its own oilfields, or if the conflict is drawn out.

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

An invasion will almost certainly close Iraqi crude output of 2.5 million barrels per day (bpd) and its southern neighbor, Kuwait may also be forced to shut some fields near its border.

Oil giant Royal Dutch/Shell said on Wednesday it had closed an oilfield in Iran, close to the Iraqi border, because of its proximity to the potential conflict zone.

The offshore Soroosh field pumps 60,000 bpd, and is the first field outside Iraq to have closed because of war fears.

IRAQ EXPORTS SLOW

Iraqi oil exports, ranked seventh largest in the world, have already slowed dramatically this week because most Western companies are unwilling to take the risk on uncertain supplies.

The United Nations said Baghdad was still permitted to export through a pipeline to the Turkish Mediterranean. One ship is expected to load there on Friday, traders said.

The OPEC oil cartel has promised to fill any supply gap caused by war, but many members have already increased supplies to their full extent. Analysts believe any prolonged outage of Iraqi supply, with some impact on Kuwait, would test the group's spare capacity to the limit.

A cold northern winter and prolonged supply hitch from Venezuela have already drained commercial stockpiles to historic lows in the world's top oil consumer, the United States.

Official figures due for release later on Wednesday are expected to show a slight build in stocks of crude, which are at lows not seen since the mid-1970s.

The United States has made preparations to release 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.

Any decision would probably be taken in tandem with the International Energy Agency, the West's energy watchdog, which monitors government oil stocks in 26 industrialized nations.

These stocks, added to reserves held by industry, could cover those countries' total import needs for 114 days.

Keiichiro Okabe, head of the Petroleum Association of Japan, said he did not expect the agency to order a release if the war ends quickly.