Crude plunges below $30 - Energy crisis fears fading as natural gas, gasoline prices retreat from highs

www.globeandmail.com By PATRICK BRETHOUR Thursday, March 20, 2003 - Page B1

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CALGARY -- The spectre of an energy crisis is fading as crude plunged below $30 (U.S.) a barrel for the first time in three months yesterday and other energy prices retreated from record-breaking highs.

For months, oil prices have soared as the market fixated on the dire scenario of an attack by the United States against Iraq pushing already low crude inventories to critical levels, and leading to shortages of gasoline, heating oil and jet fuel.

Now, those fears are evaporating. Stores of crude oil are rising, if only slightly, and the United States is entering a period of relatively low demand for oil, the lull between the winter heating season and the summer, when gasoline consumption peaks.

And millions of barrels of oil are headed from Saudi Arabian ports to the east coast of North America, as the biggest member of the Organization of Petroleum Exporting Countries pumps crude at near-peak production.

Crude oil fell $1.79 to $29.88 a barrel yesterday on the New York Mercantile Exchange, the first time it has closed below the $30 mark since mid-December, when prices began to soar in response to production shortfalls from Venezuela and the rising threat of a war against Iraq. Over the past week, crude has dropped more than $9 a barrel.

Natural gas prices, too, have fallen sharply -- they are down nearly 45 per cent from their late February high -- as frigid weather in eastern North America has given way to spring temperatures.

And pump prices, which hit a record high last week in Canada, are finally starting to ease as the cost of crude moderates.

Another upward spike in the price of oil is possible, but it will be driven by facts -- such as Saddam Hussein destroying Iraqi oil fields during war with the United States -- not inchoate fears, said Vincent Lauerman, global energy analyst at the Canadian Energy Research Institute in Calgary.

"It's the surprise that is going to cause prices to jump back up."

Even if Iraqi sabotage or a terrorist attack does cause oil prices to spike, crude likely will not rise beyond $40 a barrel, Mr. Lauerman said.

Such a rise would be short of the high set in the prelude to the Persian Gulf war 12 years ago, and well short of the predictions of a surge past $50 a barrel that some analysts were floating earlier this month.

Crude is now within OPEC's pricing band for the first time this year, although it is at the upper threshold of that range.

Some analysts are concerned that the market, in shrugging off its fatalism, is now overindulging on optimism in assuming that a U.S. assault on Iraq will be quick and relatively painless. "They are pricing things for perfection right now," said Phil Flynn, a senior energy trader at Chicago-based Alaron Trading Corp.

For now, however, oil is on the decline -- and deflating the bubble in pump prices.

The national average cost of regular gasoline in Canada, after hitting a record high last Tuesday, dropped sharply this week, declining 4.4 cents a litre to 79.6 cents, according to a weekly survey from M.J. Ervin & Associates Inc.

The weekly snapshot of retail prices across the country is taken on Tuesday morning, so it may not fully capture this week's decline in crude prices, which are off more than $5 in the past two sessions.

Typically, a $1 decrease in the cost of oil leads to a 1-cent (Canadian) drop in the price of gasoline. On that basis, gasoline prices could be headed for another steep drop this week.

And not all cities across Canada saw prices drop over the past week: drivers in Victoria and Halifax, for instance, have yet to see gasoline decline, despite a fall in wholesale costs.

"We've seen it in some markets, and there could be more to come in others," said Cathy Hay, a senior associate at M.J. Ervin.