Oil market seeks stability

The oil market has done a good job

A wild ride for oil prices leading into the US 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% in the past week to below $US27 a barrel on expectations of a swift victory for US forces in Iraq.

Just three weeks ago, prices were near $US40 after a dizzying 60% 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 $US40 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 US dollar. But oil's dependence on the Middle East, which supplies 40% 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 AG 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.

US 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.