Energy experts see method to oil price madness

Reuters, 03.21.03, 4:46 PM ET By Richard Valdmanis NEW YORK (Reuters) - A wild ride for oil prices leading into the U.S. war on Iraq may have looked mad to people on the sidelines, but experts say the dramatic price moves reflect a market doing its job to ensure stable supplies. Oil prices have dropped 30 percent in the past week to below $27 a barrel on expectations of a swift victory for U.S. forces in Iraq. Just three weeks ago, prices were near $40 after a dizzying 60 percent rise in three months on fears that the coming war would cut Middle East supplies. "The oil market has done a good job," said Jim Ritterbusch, an analyst with Ritterbusch and Associates. "Prices shot up to $40 because of a very uncertain outlook for the war amidst low stock cover here at home, and signaled the need for higher imports. And the price plunge was a market mechanism simply discounting for a fast, clean war." Oil's dramatic prewar gyrations were mirrored in other financial markets including gold, stocks and the U.S. dollar. But oil's dependence on the Middle East, which supplies 40 percent of world crude exports, made it swing even more dramatically. The petroleum price meltdown was similar to the situation of more than a decade ago when the United States launched its offensive in the first Gulf War. The difference was that the selloff this time started even before the opening missile salvos, as dealers scrambled to stay ahead of the price curve. "The reversal has gone from 'Oh God, this is going to be awful' to 'We're just going to walk right into Baghdad with flowers in our gun barrels,"' said Bill O'Grady, analyst at A.G. Edwards. A lack of spare supply has made oil markets more vulnerable than usual to sudden moves, driven by investment fund speculators taking big bets on the direction of prices. U.S. crude oil supplies are near the lowest levels since 1975 after an oil workers' strike in key regional oil exporter Venezuela ran down supplies during a severe northern winter.

RED FLAG TO SUPPLIERS The red flag of $40 oil, raised because of further worries that conflict could mean shipping disruptions or widespread damage to oil fields, was clearly seen by the world's major exporters, including OPEC kingpin Saudi Arabia, which has ramped up its production levels. "Now there are fears of a wall of oil coming from the Middle East," O'Grady said. "The market is expecting some 39 million barrels in crude oil imports over the next six weeks." Expectations that higher Saudi supplies will soon reach U.S. shores have enabled the Bush administration to avoid tapping emergency oil reserves. "OPEC quickly jumped into the fray and said we're going to meet market requirements when we get into a war situation," added Ritterbusch. "Now the market has seen OPEC easily compensate for lost Iraqi oil flows at a time of the year when global oil demand tends to slip." The early indications in the U.S. attack on Iraq are also cultivating optimism among oil dealers of a swift war without major disruptions to oil flows -- helping push prices back below $30 a barrel, analysts said. While there are reports of some burning oil fields in southern Iraq, the Pentagon forecast the U.S. military would take control of those fields and secure them later Friday. There are also few indications of any impact on oil operations in neighboring countries. "It became more clear that prices did not reflect the real market fundamentals," said Sarah Emerson, an analyst for Energy Security Analysis Inc. "Uncertainty was replaced by certainty. How far down does it go? Well, the war is going well, but I think we're close to the floor."