OIL UPDATE: Supply Disruptions Minimal, Glut Feared

sg.biz.yahoo.com Friday March 21, 3:47 AM By Masood Farivar OF DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--U.S. crude oil prices tumbled again Thursday afternoon, as Baghdad came under new bombardment and U.S. Marines crossed into Iraq.

The developments rekindled speculation the conflict will be short lived, leaving the world flooded in oil pumped to head off a supply disruption that many traders now think won't be very significant.

Oil prices had rallied earlier in New York and London on reports that some oil wells in southern Iraq were on fire, raising concerns about long-term damage to Iraq's production capabilities. But the scale of the bombardment that followed reinforced a persistent belief that the war will be a quick one and "usher in an era of new low oil prices," said Phil Flynn, an analyst at Alaron Trading Corp.

May light, sweet crude futures at the New York Mercantile Exchange fell as much as $1.61 to a low of $27.75 a barrel. Less-active April futures, which expire Thursday, were down as much as $1.88 at $28.00 a barrel, a three-month low for a contract closest to expiration.

"The harder we bomb, the more we come off," a floor trader said of the selloff.

Nymex crude oil futures, after soaring to nearly $40.00 a barrel ahead of the war, have fallen 26% in the past six trading days as a U.S. attack began to appear inevitable.

OIL UPDATE -2: Supply Disruptions Minimal, Glut Feared

The price decline has come as officials in both producing and consuming countries reassured the market that they won't allow supply shortages to develop. The Organization of Petroleum Exporting Countries said it would make up for any shortfall resulting from the war.

In a statement issued shortly after news of the military strikes Wednesday night, OPEC President Abdullah Bin Hamad Al-Attiyah said he had consulted with OPEC members who have "pledged to use, in the interim, their available excess capacities to ensure continued supply."

In a departure from the events of the Persian Gulf War in 1991, neither the International Energy Agency, the Paris-based energy watchdog for the West, nor the U.S. has ordered the release of crude oil from their strategic reserves, saying supply disruptions haven't been sufficient to warrant the step.

U.S. Energy Secretary Spencer Abraham said Thursday that the U.S. and others in the IEA will release some of their 1.2 billion barrels of crude oil reserves "if needed" during the Iraq war.

But he also pointed to recent efforts by oil-producing countries to increase supply, in particular a sharp increase in Saudi oil output in recent weeks.

Analysts said those comments helped assuage fears that a war in Iraq - which produces 3% of the world's oil - could create severe supply shortages.

Iraq's 1.7 million barrels a day of oil exports have essentially come to a halt. But initial reports from the U.S. Navy have indicated no signs of disruption to shipping lanes in the Persian Gulf, including the crucial Strait of Hormuz. Tankers continued loading crude Wednesday at Kuwait ports, just a few dozen miles south of Iraq.

Global supplies are such that the White House dismissed concerns about reports that a handful of oil wells in southern Iraq were on fire.

"World energy supplies are more than adequate to compensate for any disruption these acts may cause," White House spokesman Ari Fleischer said, reiterating that the U.S. saw no need to tap its Strategic Petroleum Reserve. "Saudi Arabia and other major energy suppliers have increased production and their exports are proceeding normally in this regard."

Glut Feared

U.S. oil inventories are near 30-year lows and producers are nearing the limits of their capacity, so there is little margin for error in the event supplies in the oil-rich Persian Gulf region are substantially disrupted.

But with OPEC pumping at unusually high levels, Venezuelan output returning to more normal levels and a colder than normal winter largely over, traders are now factoring in the prospect of a glut in the market.

"Assuming that everything goes well, the fundamentals look fairly bearish," said Aaron Brady, an analyst at Energy Security Analysis Inc. in Wakefield, Mass. "OPEC is pumping at a high rate, Venezuela is back, and even if Iraqi oil is cut off for some period of time, it is manageable."

A glut-induced drop in oil prices would be welcome news for the U.S. economy, which has been struggling to mount a recovery while burdened with high energy costs, and U.S. consumers, who are paying record prices for gasoline.

But it terrifies OPEC members, who have already begun to talk about the need to cut output to head off a plunge in prices.

"If prices go through the floor, we will decide about cutting production in the same way that we put oil in the market when prices go through the roof," OPEC Secretary-General Alvero Silva said.

Through unusually high levels of coordination, OPEC members have managed to support prices at relatively high levels for more than three years. But some traders see trouble ahead for the group's winning streak.

Iraq will badly need to boost revenues to rebuild, leading some to speculate that the country, a founding member of OPEC, may want to leave the group to escape its quota restrictions. That could weaken OPEC's resolve to tighten global supplies, analysts said.

"There is a a perception that a regime change in Iraq will dramatically change the world oil balance of power," Flynn said.

-By Masood Farivar, Dow Jones Newswires; 201-938-2094; masood.farivar@downones.com