Oil extends a week-long slump - Prices swing lower as dealers continue to predict an easy victory for the U.S. in the Iraq war.

March 20, 2003: 5:27 PM EST

NEW YORK (Reuters) - Oil prices Thursday afternoon lost gains notched earlier in the day, as the United States launched a widening offensive on Iraq and dealers predicted an easy victory for Washington.

Prices swung wildly during the day on reports, denied by Baghdad, that three or four oil wells were on fire in the south of the country.

OPEC exporters said they could fill any supply gap from the conflict in the oil-rich Gulf, and said markets already were well supplied. The West's energy watchdog, the International Energy Agency, said it saw no reason to release emergency stocks.

Shortly after 2:45 p.m. ET, light crude for May delivery settled $1.24 lower at $28.12 a barrel on the New York Mercantile Exchange, after rising as much as 76 cents on reports of oil well fires in Iraq.

Benchmark Brent crude oil fell $1.25 to $25.50 per barrel in London, having touched a three-month low of $25.30.

Oil has shed a quarter of its value in the last week on a massive bet by investment funds that war will end quickly, without causing major damage to oil installations.

"The war premium is diminishing on a growing certainty that coalition forces will prevail," said Peter Gignoux of Schroder Salomon Smith Barney.

Hours after U.S. cruise missiles hit targets in Baghdad, officials in neighboring Kuwait said oil output was normal, despite two Iraqi missiles hitting the north of the country.

Oil tanker traffic from the Gulf, which provides 40 percent of world oil exports, also was running smoothly, shippers said.

U.S. Defense Secretary Donald Rumsfeld said he had indications Iraq may have set fire to some wells, but Reuters eyewitnesses said there were no signs of fire at oil fields close to the border with Kuwait.

Iraq stopped exporting oil from its southern fields earlier this week, when United Nations inspectors left the country. Limited exports continued Thursday through a pipeline to the Turkish Mediterranean.

Heating oil for May delivery fell 2.51 cents to 75.9 cents a gallon. May unleaded gasoline price lost 3.76 cents to 89.59 cents a gallon.