Oil prices shedding 'war premium' Slide continues thanks to belief in stable supplies

www.denverpost.com By Steve Raabe Denver Post Business Writer Friday, March 21, 2003

Forget the "war premium."

Oil prices fell Thursday for the sixth consecutive day, despite the outbreak of war in Iraq.

Energy analysts had coined the war-premium phrase to describe a run-up in oil and gasoline prices since the start of the year, when conflict with Iraq began to seem likely.

But crude oil fell to a three- month low Thursday on market perceptions that the war won't have a big impact on petroleum supplies.

Crude for April delivery fell $1.27, or 4.3 percent, to $28.61 a barrel on the New York Mercantile Exchange, the lowest closing price since Dec. 13.

"We may be looking at some relatively stable prices," said Marc Smith, executive director of the Denver-based Independent Petroleum Association of Mountain States. "The marketplace believes that there are going to be steady supplies of oil."

That bodes well for consumers, analysts said, although it will take weeks for falling oil prices to show up at gasoline pumps.

The price swing parallels a similar shift that occurred during the first Gulf War.

After Iraq invaded Kuwait in August 1990, crude prices reached all-time highs of nearly $41 a barrel, with gasoline prices rising to a then-record national average of $1.35 a gallon.

But on Jan. 16, 1991, the first day of American air attacks on Iraqi targets, oil fell $10 a barrel, a record 33 percent one-day decline.

While crude oil prices are volatile and hard to predict, some analysts see further price declines.

"Part of the war premium is coming off, and I believe there is still more of the premium that could come off," said Peter Mueller, senior director in Denver of the R.W. Beck Oil and Gas Group. "I think we'll see downward pressure on oil prices and associated downward pressure on natural gas."

Thursday's trading in oil markets was volatile, first rising on reports that Iraq had begun torching oil wells.

But prices fell later in the day after reports that damage so far was limited to just a handful of wells in southern Iraq. Iraq has nearly 1,700 wells.

The National Oceanic and Atmospheric Administration said its polar-orbiting satellites recorded images of smoke plumes that appeared to confirm reports of oil fires.

U.S. government officials have speculated for weeks that Iraq is placing explosives on oil wells, as it did in Kuwait before blowing up 700 wellheads during the first Gulf War.

Several oil-field firms that specialize in extinguishing well fires are preparing to send crews to Iraq.

Yet even if all Iraqi oil production stops, as most industry experts expect, the Organization of Petroleum Exporting Countries has said it will increase oil pumping to make up the deficit.

Until recently, analysts had been skeptical of OPEC's ability to make up for Iraqi production because of lingering supply deficits from the recent oil strike in Venezuela.

But Venezuelan exports have increased in the past month, leaving more of a supply cushion to cover Iraqi shortfalls.

Oil prices also could ease because warmer weather will reduce demand for heating oil, a crude-oil byproduct used for home heating by millions of households in the eastern United States.

Energy economist John Falmy of the Washington-based American Petroleum Institute said an $8 decline in crude oil prices over the past week should translate into a 19-cent-a-gallon decrease in retail gasoline prices.

But the price drop won't be seen until imported crude makes its way from overseas producers to the U.S., and then through refining and distribution channels.

"It may take about five weeks to see it at the pump," Falmy said.