Oil Drops as U.S. Launches War on Iraq

Thu March 20, 2003 05:05 AM ET By Tom Ashby

LONDON (Reuters) - Oil prices tumbled to three-month lows on Thursday after the United States began bombing Iraq and dealers bet on a swift U.S. victory with little disruption to Middle East supply.

OPEC exporters pledged to fill any supply gap from the conflict in the oil-rich Gulf, while the West's energy watchdog, the International Energy Agency, said it saw no reason to release emergency stocks for the time being.

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

Supplies from the world's top exporter, Saudi Arabia, were also running smoothly, shippers said.

Benchmark Brent crude oil fell 53 cents to $26.22 per barrel, having touched a three-month low of $25.50.

Brent futures have shed 25 percent of their value in the last six days on a massive bet by investment funds that war will end quickly without major damage to oil installations.

U.S. crude futures fell 75 cents to $29.31.

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

Industry consultant Geoff Pyne said there were still dangers ahead that could drive prices back up.

"Most obviously, there is a danger that Saddam may blow up the Iraqi oilfields," he said.

Iraqi Oil Minister Amer Rasheed denied a Kuwaiti television report that oil wells near the southern city of Basra were on fire.

OPEC TO FILL SHORTFALL

The Organization of Petroleum Exporting Countries said it would tap its spare capacity to make up for any shortage from Iraq. OPEC President Abdullah al-Attiyah of Qatar said he had spoken with cartel members following the U.S. 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."

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. However, he also said that world markets were currently well supplied.

"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 barrels daily -- versus an OPEC quota of eight million -- in part to cover outages from strike-hit Venezuela.

The International Energy Agency said there was no need for import-dependent Western nations to release emergency stocks as it was confident OPEC could cover the shortfall.

"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."

Iraqi exports have ground to a virtual halt this week after the United Nations evacuated its staff overseeing Baghdad's oil-for-food program.

The International Energy Agency, which oversees some four billion barrels of oil inventory in 26 industrialized countries, said a release would become necessary only in case of a shortage that could not be covered by OPEC.