Prolonged war clouds oil outlook
<a href=www.canada.com>Freelance PETER HADEKEL Friday, March 28, 2003
The war's outlook is as clouded as the sand storms blowing through the Iraqi desert. And so is the outlook for oil and gasoline prices.
Early optimism about a rapid and successful outcome in Iraq sent oil prices plunging by 30 per cent last week, sparking a huge rally in the stock market.
But as traders and investors remained glued to their TV screens this week, crude-oil futures began to rise with the realization that the war won't end quickly.
First, the good news.
"There is more oil in the market than it can absorb," OPEC president Abdullah al-Attiyah declared yesterday. "This is obvious from the fact that prices have dropped."
Production in other Middle Eastern countries has not been disrupted and is running smoothly.
Crude-oil futures in the U.S., which traded yesterday at around $30 a barrel, are much cheaper than they were last month, when they hit $40. Fears of gasoline prices hitting $2.50 a gallon in the U.S. have receded.
So have fears that retreating Iraqi troops would torch the country's oil fields, as they did during the 1991 Gulf War.
Most of the wells in southern Iraq, the centre of the country's industry, have been secured by coalition troops, and oil-well recovery teams are poised to fly into Iraq to restore as much production as they can.
Now, the bad news.
A British military official said Iraq's Rumaila oil field, the country's largest, is in bad shape and will require investment of at least $1 billion to restore its production of 1.8 billion barrels a day.
By some estimates, it will take at least three months for oil exports to resume from southern Iraq.
This will not help to ease fears of looming crude shortages elsewhere.
While oil production in strike-torn Venezuela has stabilized, there are new concerns about instability in Nigeria, the fifth-largest oil exporter to the U.S. market.
Royal Dutch Shell, Chevron Texaco and Total Fina Elf are among oil companies that have shut down operations in Nigeria because of clashes between soldiers and ethnic militants.
The violence has halted production of 800,000 barrels a day - almost 40 per cent of Nigeria's oil production.
For the U.S. domestic economy, this complicates an already tight supply situation. The Department of Energy this week reported a larger-than-expected decline in gasoline inventories, raising fears about supply shortages during the summer driving season. The DOE said inventories are about seven per cent below where they would normally be at this time of year.
U.S. pump prices are about 30 cents a gallon higher than they were a year ago, according to the American Automobile Association.
"Current inventory levels are below the tight levels of 2000, and well below the surpluses that existed during the 1991 Gulf War," said Steven Pfeifer, Merrill Lynch's senior Integrated Oils Analyst. Inventories need to start climbing now in order to avoid a summer spike in gasoline prices.
Many parts of the country suffered the coldest winter in years, putting further pressure on refiners.
The importance of oil and gasoline prices to the U.S. economic recovery can't be overstated. Soaring prices over the last few months have acted like a big tax increase on U.S. consumers and businesses.
But while the consensus among economists is that a short war will send oil prices back to the $25 range, the risks of prolonged conflict remain.