Overheated oil prices keep cooling
www.canada.com
Chris Varcoe
Calgary Herald
Thursday, March 20, 2003
Oil prices continued to cool off Wednesday, sinking below $30 US a barrel for the first time this year as energy markets expect a brief war in Iraq.
With a U.S.-led war imminent in the Middle East, crude oil for April delivery plunged $1.79 to $29.88 US a barrel on the New York Mercantile Exchange. In London, benchmark Brent crude futures fell 50 cents to $26.75 a barrel on the International Petroleum Exchange.
Industry analysts said overheated oil prices, which ran up to $39.99 a barrel last month, have lost ground due to expectations that Middle East supplies won't be seriously disrupted by a war with Iraq.
"We saw significant speculation running up the price of oil," said Rick DeWolf, an energy analyst and principal with Navigant Consulting in Calgary.
"Now that there's the certainty of war, Saudi Arabia and others have assured the world that there will be sufficient oil supplies."
During the past week, crude prices have tumbled more than 20 per cent. The slide mirrors a precipitous drop that opened the 1991 Persian Gulf War.
"Oil prices just got hammered today. I keep saying we had a war premium last week, and this week we have a peace premium," Phil Flynn, a senior energy analyst with Alaron Trading Corp., in Chicago said. "It's a sign of confidence that this war will go very quickly and very easily."
Military action in Iraq is expected to halt the country's production of oil, which averaged 2.3 million barrels a day last month. Iraq's southern neighbour, Kuwait, may also be forced to shut some oilfields near its northern border.
International oil giant Royal Dutch/Shell Group said Wednesday it had closed an oilfield in Iran, close to the Iraqi border, because of its proximity to the potential conflict zone.
While oil prices hovered above $30 a barrel for the past three months, some industry insiders fear prices could tumble sharply in the weeks ahead as the world becomes awash in crude.
OPEC kingpin Saudi Arabia has cranked up output in recent weeks to more than nine million barrels a day to help offset lost oil from Venezuela, which suffered labour disruptions earlier this year. Other OPEC members are producing at capacity.
Crude inventories have also been rising recently in the United States from rock-bottom levels. The American Petroleum Institute reported Wednesday a five-million barrel build-up last week, although the U.S. Department of Energy pegged the number at 400,000 barrels.
The United States is also ready to release oil from its strategic petroleum reserves to prevent a supply interruption, but only as a last resort if OPEC producers are unable to overcome the shortage.
Any decision would probably be taken in tandem with the International Energy Agency, which monitors government oil stocks in 26 industrialized nations.
For Canada, high oil prices have meant climbing energy costs for consumers and many manufacturing businesses, but rising profits for petroleum producers.
"For Canada, oil is a two-edged sword," Bank of Canada Governor David Dodge said Tuesday.
"We see significant income gains, particularly in Western Canada. Those income increases in the West offset the losses in the East where the economy is more closely tied to manufacturing and exports."
With files from Reuters