Oil futures prices plunge as traders forecast glut

www.kansas.com Posted on Thu, Mar. 20, 2003
BY DAN PILLER Fort Worth Star-Telegram

As zero hour approached Wednesday for the beginning of the second Gulf War, energy traders worked on the ironic realization that the world suddenly had a glut of oil and that prices are likely to fall.

Futures prices have dropped from a 12-year high of $37.10 a barrel just a week ago to close Wednesday at $29.88 for April delivery, just hours before the expiration of President Bush's ultimatum to Saddam Hussein that would trigger the onset of hostilities in Iraq.

Futures prices tend to run three to four weeks ahead of the pump prices. Whether that declining price holds long enough for motorists to benefit remains to be seen. But traders in New York and London obviously had separated their markets from the war anxieties of the region that holds the world's largest oil reserves.

"The world is beginning to realize that there is a bit of a glut of oil," said Leo Drollas, chief economist for the Center for Global Energy Studies in London.

In recent days some traders have begun to talk of prices dipping back into the low to mid-$20s price range from the $35 a barrel average that has held since Bush began his pressure campaign late last year against Saddam Hussein.

Such a decline would mirror the experience of 12 years ago when Operation Desert Storm was unleashed. Despite fears of disruption of Middle East oil shipments, Americans actually saw fuel prices decline by a third through early 1991 even before their armies stormed to a quick victory in Kuwait.

Today's market predictions of lower prices are based on the continued promises of Organization of Petroleum Exporting Countries producers to cover any losses to Iraqi production and ship to the United States and Western Europe the oil necessary to keep those economies going.

OPEC may have already primed the pump. Reports have surfaced this week of as much as 50 million barrels of oil at sea on tankers, a greater-than-normal volume in the pipeline.

Worldwide daily production now is 77 million barrels. U.S. producers pump about 7 million barrels a day. The United States imports the other 60 percent of the 19.5 million barrels it consumes daily.

OPEC also knows that the U.S. Strategic Petroleum Reserve is brimming with a four-month supply of oil, analysts said. It also has ready access to more than 5 million barrels daily from Canada, Venezuela and Mexico. OPEC can ill afford to blow off the American market as it did with two embargoes in the 1970s.

Since then, the United States created the Strategic Petroleum Reserve embraced more fuel-efficient automobiles and refocused the 60 percent of its daily oil supply that it received from the Middle East to more stable sources in this hemisphere.