OIL UPDATE: Nymex Spikes Up On Fears Of Prolonged War
Source Monday March 24, 2:36 PM By Irene Kwek Of DOW JONES NEWSWIRES
SINGAPORE (Dow Jones)--Oil prices strengthened early Monday in Asia, boosted by concern among market participants that the Iraq war might go on longer than many had initially envisaged.
Crude futures on the New York Mercantile Exchange spiked as much as 79 cents a barrel, or 2.9%, to $27.70/bbl in the first minutes of the after-hours Access session, reversing most of the losses from Friday's floor trade.
"People think the war is going to take longer, and (the coalition forces) will face more resistance than expected," a U.S.-based broker said.
The gains in crude futures helped lift the rest of the petroleum complex, with May gasoline futures posting a 1.43-cent gain to 85.90 cents/gallon at 0635 GMT. April heating oil was up 1.65 cents to 77.21 cents/gallon.
At 0635 GMT, Nymex May crude was at $27.42/bbl, shedding some of its gains early in the session.
Nymex May crude futures plummeted to a three-month low at the close of floor trade Friday as coalition forces secured Iraq's Southern oil fields, helping to support market perception that the war in Iraq would see a quick end.
But reports over the weekend that coalition forces were facing fierce resistance in their push to Baghdad led market participants to start factoring in the possibility that the war in Iraq could be a long drawn-out affair.
"There's another chance we could see another oil price spike because in the past few days the futures were oversold on speculation that it would be a quick war," said Gordon Kwan, HSBC's oil and gas analyst.
"But today's military action appears to suggest otherwise, that this will be longer than expected. The deteriorating situation in Nigeria, Venezuela's production is still off-peak, and some production was lost in Iraq and Kuwait...We can see oil prices bouncing back," he said.
"Oil prices could retest $30/bbl again this week unless the military operations were extremely smooth going into Baghdad, but it appears to be more difficult than we have witnessed so far," he said.
Stiff Resistance
U.S. and U.K. officials late Sunday said specially trained paramilitary guerrillas and Saddam Hussein's security forces were leading the stiffest resistance to the U.S.-led invasion, trying to keep Iraqi soldiers from surrendering and organizing battlefield tricks that have inflicted casualties.
Members of the Fedayeen Saddam are suspected of having organized battlefield ruses using civilian clothes and cars and fake surrenders of Iraqi soldiers that drew in U.S. forces to be attacked in places like An Nasiriyah and Umm Qasr, the officials said.
The Fedayeen are elite inner-circle soldiers totaling about 15,000 that report directly to one of Saddam's sons.
Other difficulties included Iraq's capture of a handful of U.S. soldiers, the accidental downing of a U.K. aircraft by a U.S. missile, and a grenade attack on forces in Kuwait blamed on a Muslim U.S. soldier.
U.S. President George W. Bush and U.S. military officials said the Iraqi regime ultimately will fall, but warned of tougher fighting to come as U.S.-led forces advance on Baghdad.
Bush said Sunday that Iraq's Southern oil fields were secure and that most of the South was in allied hands, though there were pockets of resistance. British forces were holding the area, and experts were being brought in to fight the 10 or so well fires, U.S. Defense Secretary Donald Rumsfeld said Sunday.
However, coalition forces still hadn't secured the country's rich oil fields in the North.
In other developments, ChevronTexaco Corp. (CVX) shut down 440,000 barrels a day of oil production in the western Niger Delta in Nigeria due to ethnic violence. Royal Dutch/Shell Group (RD) and TotalFinaElf (TOT) have also shut in some production there, leaving 28% of the country's 2.2 million barrels a day in output off line.
More Than Ample Supply?
Despite the disruption of Iraqi oil exports due to the war, Societe Generale raised the possibility of a major surplus in the second quarter that will be difficult for the Organization of Petroleum Exporting Countries to manage.
SG noted in a research report distributed Monday that a combination of lower seasonal demand in the second quarter, a possible release of U.S. strategic reserves, and increased oil production, all mean that there are sufficient alternative sources of oil to make up for the disruption of Iraqi exports.
Since the start of the year, OPEC output, excluding Iraq, has increased by more than 3 million b/d, thanks to the return of Venezuelan oil exports and an increase in output by Saudi Arabia and other OPEC countries with spare capacity, it noted.
Looking ahead, the challenge facing OPEC will be to react promptly after the war ends to prevent oil prices from collapsing, SG said.
"Yet it is precisely because we believe that OPEC will be unable to show the same responsiveness as in the past that we are more bearish than the market consensus for the second quarter," SG said.
-By Irene Kwek, Dow Jones Newswires; 65-6415-4062; irene.kwek@dowjones.com
-Edited by Nick vonKlock