Prices of crude oil falling like bombs

www.miami.com Posted on Fri, Mar. 21, 2003 BY CHRISTINA HOAG choag@herald.com

As the United States intensified its military assault on Iraq, crude-oil prices tumbled Thursday to three-month lows in a day of swings sparked by reports of fires at oil wells.

Crude-oil futures sank for the sixth consecutive trading session, to $28.61 per barrel, a slide of $1.27 from Wednesday. But prices swung between a high of $30.60 and a low of $28, a volatility caused by military reports that three or four wells in Rumaila, in southern Iraq, had been set ablaze.

''The market is pricing based on a best-case scenario of a pristine military operation by U.S.-led forces,'' said John Kilduff, energy-risk management analyst at Fimat USA. ``But the volatility is incredible.''

Experts warned that oil-field sabotage and shipping-lane disruption could easily cause prices to skyrocket. As a result, motorists are unlikely to see any immediate relief at the pump.

Miami's average for regular gas remained at a record $1.761 Thursday, while Fort Lauderdale stations averaged a penny below Wednesday's all-time high of $1.767, according to AAA.

''Things are looking a lot better,'' said Lawrence J. Goldstein, president of the Petroleum Research Industry Foundation. ``. . . But there will be a lag before we see that in the gasoline on the street.''

Over the last week, the so-called ''war premium'' that had added $5 to $8 to oil prices since last fall has been almost wiped out. Despite the loss of almost all Iraqi production of 2.5 million barrels a day, prices have plunged 28 percent since hitting a 12-year high of $39.99 on Feb. 27. On Monday, the United Nations shuttered its Food for Oil program.

''The irony of the situation is that Iraq's exports have been cut off,'' said John Kingston, global director of oil for Platts.

A similar price plunge occurred in January 1991, when U.S.-led forces launched air raids on Iraq. Oil plummeted by a third, from the prewar escalation that had jacked up prices to $41.15 in October 1990 after Iraq invaded Kuwait.

This time, analysts say, factors other than the anticipation of an easy defeat of Saddam Hussein are softening prices. These include:

• OPEC's pledge to goose output should supplies be disrupted for a prolonged period.

• Saudi Arabia's production of an extra million barrels a day and the fact that the Saudis said this week that they were harboring a 50 million-barrel emergency reserve.

• An increased flexibility on the part of the United States and Europe in releasing their strategic supplies.

• The realization that demand will likely start dropping as the Northern Hemisphere moves into spring.

• The knowledge that Venezuela's crude-oil output is being ramped up following a crippling workers' strike.

• And the fact that U.S. crude stocks, which had reached record lows as refiners drew down inventories rather than buy supplies at premium prices, are starting to swell, although they remain at uncomfortably low levels unseen since the 1970s.

Still, the rosy picture could dim overnight. Key to keeping the oil market stable is the allied forces' capture of the Iraqi oil fields in order to prevent sabotage that could sideline production for an extended period.

In February 1991, retreating Iraqi forces set alight more than half of Kuwait's 1,200 oil wells. With that in hindsight, current military plans call for quickly seizing the southern oil area of Basra and the nearby port of Umm Qasr. The oil fields lie only 29 miles over the Kuwaiti border. A special ground force has been designated to secure the area.

U.S.-led forces hope that a warm welcome from the region's inhabitants will make the job easier. Historically, there has been no love lost between Basra's approximately one million Shiite Muslims and Baghdad's ruling Sunni Muslims. At the end of the Persian Gulf War in 1991, Basra staged an uprising against Hussein.

But Basra's is a small field. The real prizes would be the giant fields surrounding Kirkuk, a Kurdish stronghold near the Turkish border.

And since Turkey has granted the United States access to airspace alone, that, Kilduff said, ``will definitely be a trickier proposition.''