Oil price vulnerable but nightmare fades

<a href=news.ft.com>Financial Times By Carola Hoyos, Energy Correspondent Published: April 3 2003 18:52 | Last Updated: April 3 2003 18:52

As Baghdad looms larger in the sights of US and British soldiers, the nightmare of oil at $50 or even $100 a barrel is fading.

Although oil prices will remain vulnerable as the battle for Baghdad begins, they are a long way from their March high of $39.99 a barrel.

And as long as most of Iraq's oil wells remain intact, analysts say, there is little chance that prices will reach the $41.15 peak prices hit after Iraq invaded Kuwait in 1990.

Two main factors explain why this war with Iraq has had far less impact on oil prices than the last: timing and the fact that Saddam Hussein has not managed to wreak havoc in the oilfields as he did in 1991.

Then his troops damaged 700 Kuwaiti oil wells, leaving the emirate to spend two years rehabilitating its oil sector before it could return to full production.

Since the beginning of the current conflict, the world has lost 2.4m barrels a day of Iraqi production, which has been made up by Saudi Arabia and other Opec members, who increased their output quota to 24.5m barrels a day in January and then suspended restrictions altogether at the start of the conflict.

Spencer Abraham, US energy secretary, on Thursday confirmed Opec's key role, saying: "We've seen a substantial increase in Opec-10 production, more than enough to compensate for losses in Iraq and Nigeria."

But perhaps the most important factor was the timing of President George W. Bush's decision to launch his campaign, at a time when Venezuela's exports were recovering from the interruption in December and January caused by the country's national strike.

March also brought the first signs of spring to the northern hemisphere and a reduction in the level of oil required for winter heating.

This helped offset the loss of Iraq's oil and some of Nigeria's production, which was halted by ethnic violence ahead of this month's elections.

Oil refiners have even begun to rebuild their stocks, which earlier this year had fallen to levels not seen since the mid-1970s.

Meanwhile, the governments of US, Japan, Germany and South Korea were able hold on to their strategic stockpiles of oil which they were ready to release in the event of a serious interruption in supplies.

However, the uncertainty over the conflict in Iraq and the loss of Venezuela's exports have left their mark.

UK benchmark Brent crude oil prices averaged $31.47 a barrel during the first quarter of this year, $5 more than the fourth quarter of 2002 and $10 more than a year ago, according to BP's latest trading statement.

The jump in the price of WTI, the US benchmark crude, was even more dramatic. It averaged $34 a barrel, from $28.31 at the end of 2002 and more than $12 above prices a year ago.