Oil Prices Off on War News and Increase in U.S. Supply

<a href=www.nytimes.com>The New York Times By NEELA BANERJEE

The price of oil fell 4 percent yesterday, as traders took heart that supplies might be growing soon because of the recent progress of coalition forces in Iraq and increases in oil supplies in the United States.

Oil for May delivery was down $1.22, to $28.56 a barrel, at the end of trading yesterday on the New York Mercantile Exchange.

The price of oil has fallen nearly 8 percent in the last two days alone. But oil traders and industry experts cautioned that the decline was the latest swing in a market that would remain volatile for weeks because of political conflict in several major oil-producing states.

Oil exports from Iraq have been suspended. Ethnic conflict in the oil-rich Niger Delta has compelled three Western oil companies to forgo nearly 800,000 barrels a day of oil production in Nigeria. And though exports have risen from strike-torn Venezuela, many industry experts question how sustainable those shipments are.

"There are still so many balls in the air and none have come down yet," said Eric Bolling, an independent oil trader and member of the Mercantile Exchange's board. "We still have Iraq. We still have Nigeria. We still have Venezuela."

The oil markets are reacting to news from Iraq, more than anything, traders said.

So far this week, the markets have been buoyed by several reports that seemed to reinforce the sense that the United States-led forces have gained the upper hand, including the rescue of a prisoner of war Tuesday and victories on the road to Baghdad, Mr. Bolling said.

"There's this schizoid view of progress in Iraq," one Houston crude oil trader said. "The first few days, people thought the war would be over in a day. Then, last week, people thought it would take a year, and prices spiked. And now, there's a more positive view again."

Prices also fell because oil long promised by Saudi Arabia to compensate for the loss of Iraqi exports arrived in the United States, according to weekly data published by the Energy Department. Oil prices rose through much of the winter because inventories of crude oil and petroleum products like gasoline fell to alarmingly low levels because of the strikes in Venezuela and the prolonged cold weather.

But Energy Department data showed that stocks of crude oil for the week ended Friday increased 6.8 million barrels, far more than the 5 million barrels or so that many traders had expected, Mr. Bolling said. Imports of crude oil rose to an average of 10.4 million barrels a day last week, according to the data.

"The markets are now in a show-me mood," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation. "They now see the presence of large crude oil imports for the last two weeks. So they believe that for time being, the worst is over for crude oil."

But because all the world's oil exporters are producing flat-out to compensate for the export suspensions in Iraq, Nigeria and Venezuela, there is little room for any other malfunction in the system, experts and traders said. "There is still volatility going forward," Mr. Goldstein said. "You could have unscheduled refinery problems. Things could deteriorate in Nigeria or even Venezuela."