Oil Prices Tumble to Three-Month Lows

asia.reuters.com Thu March 20, 2003 03:00 AM ET By Tanya Pang

SINGAPORE (Reuters) - Oil prices tumbled by more than $1 to three-month lows on Thursday after the United States began a long-awaited war on oil exporter Iraq, and dealers bet on a swift U.S. victory with little disruption to Middle East crude flows.

The OPEC producers' cartel pledged to fill any gap in supply due to hostilities in the oil-rich Middle East, while the West's energy watchdog, the International Energy Agency (IEA) said it saw no reason to release emergency stocks for the time being.

Hours after U.S. jets began a dawn raid of Baghdad, officials in nearby Saudi Arabia and Kuwait said crude production continued normally, while shippers reported no interruptions to tanker movements.

U.S. light crude CLc1 fell $1.35 to $28.53 a barrel, while London's Brent crude LCOc1 dropped $1.02 to $25.73 a barrel.

"Prices have come down because the uncertainty is gone. The start of the war just means the end of the war is closer," said David Thurtell, commodities strategist at Commonwealth Bank in Sydney.

Geoff Pyne, consultant to Sempra Energy said there were still potential dangers ahead that could cause crude to shoot higher.

"Most obviously, there is a danger that Saddam may blow up the Iraqi oilfields, either as a defensive measure, or to deny them to the United States. Even if this doesn't happen there is a high chance of at least a month of missing Iraqi exports," Pyne said.

The White House in Washington confirmed it had launched a military attack to overthrow Iraqi President Saddam Hussein.

"These are the opening stages of what will be a broad and concerted campaign," President Bush said in a televised address.

Washington says Iraq, which supplies more than four percent of world oil exports, has stocked weapons of mass destruction in violation of U.N. resolutions drawn up after Baghdad invaded Kuwait in August, 1990. Iraq denies this.

SAUDI POISED TO FILL SHORTFALL

A Saudi source said OPEC's leading producer was poised to respond to any oil supply disruptions following the U.S. attack on neighboring Iraq.

"The crude oil is there," the source said, reiterating that the kingdom, the world's biggest oil exporter, has 10.5 million barrels per day (bpd) of production capacity.

"The market is well supplied. What everyone fears is Saddam Hussein burning the oilfields," said the Saudi source. "Events are going to be the dictating factor here."

Riyadh has already ramped up production well beyond nine million bpd before war erupted -- in part to cover outages from strike-hit Venezuela, industry sources say.

Kuwaiti crude output is running at around 2.4 million bpd, and the producer has said it will only close its northern fields bordering Iraq, which pump 400,000 bpd, if necessary.

Kuwait's oil sector is on high alert for any attack from former occupier Iraq, whose departing troops in 1991 torched hundreds of the country's oil wells.

Kuwait, Iran, the United Arab Emirates, Saudi Arabia and Qatar together ship about 15 million bpd of oil through the Gulf.

OPEC TO USE SPARE CAPACITY

The Organization of the Petroleum Exporting Countries immediately pledged to fill any shortfall in world supplies created by the U.S. attack on Iraq, where exports were running at about 1.7 million bpd up to a week ago.

Analysts reckon OPEC has between one million and two million bpd of spare capacity, with many of its members already running at full throttle.

OPEC President Abdullah al-Attiyah of Qatar said he had spoken with members of the 11-strong cartel after the U.S. launched its attack.

"As a result of those consultations, I am herewith reiterating OPEC's resolve to make up for any supply shortfall resulting from developing events," he said in a statement carried on OPEC's official news agency.

"To this end, member countries have pledged to use, in the interim, their available excess capacities to ensure continued supply."

Iraqi exports had ground to a virtual halt after the United Nations evacuated all international staff from Iraq, including those monitoring the country's oil sales under the oil-for-food exchange program.

The Paris-based IEA, the energy watchdog for industrialized nations overseeing four billion barrels of emergency stockpiles, said it saw no reason to dip into strategic reserves for the time being and it as confident OPEC would honor its pledge.

"At the precise hour we speak, I think it is not necessary (to release stocks)," IEA executive director Claude Mandil told Reuters.

"We had a very strong statement from OPEC, which has said they will ensure any shortfall and we are confident they will do their best," he said.

IEA members Japan and South Korea, two of Asia's biggest oil consumers and heavily reliant on Middle East imports, also said they saw no immediate need to release oil reserves.