Energy experts see method to oil price madness

Reuters, 03.21.03, 4:46 PM ET By Richard Valdmanis NEW YORK (Reuters) - A wild ride for oil prices leading into the U.S. 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 percent in the past week to below $27 a barrel on expectations of a swift victory for U.S. forces in Iraq. Just three weeks ago, prices were near $40 after a dizzying 60 percent 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 $40 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 U.S. dollar. But oil's dependence on the Middle East, which supplies 40 percent 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 A.G. 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. U.S. 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.

RED FLAG TO SUPPLIERS The red flag of $40 oil, raised because of further worries that conflict could mean shipping disruptions or widespread damage to oil fields, was clearly seen by the world's major exporters, including OPEC kingpin Saudi Arabia, which has ramped up its production levels. "Now there are fears of a wall of oil coming from the Middle East," O'Grady said. "The market is expecting some 39 million barrels in crude oil imports over the next six weeks." Expectations that higher Saudi supplies will soon reach U.S. shores have enabled the Bush administration to avoid tapping emergency oil reserves. "OPEC quickly jumped into the fray and said we're going to meet market requirements when we get into a war situation," added Ritterbusch. "Now the market has seen OPEC easily compensate for lost Iraqi oil flows at a time of the year when global oil demand tends to slip." The early indications in the U.S. attack on Iraq are also cultivating optimism among oil dealers of a swift war without major disruptions to oil flows -- helping push prices back below $30 a barrel, analysts said. While there are reports of some burning oil fields in southern Iraq, the Pentagon forecast the U.S. military would take control of those fields and secure them later Friday. There are also few indications of any impact on oil operations in neighboring countries. "It became more clear that prices did not reflect the real market fundamentals," said Sarah Emerson, an analyst for Energy Security Analysis Inc. "Uncertainty was replaced by certainty. How far down does it go? Well, the war is going well, but I think we're close to the floor."

NYMEX oil hits 4-month low as US/UK take oilfields

Reuters, 03.21.03, 4:10 PM ET NEW YORK, March 21 (Reuters) - NYMEX crude oil futures fell to their lowest level in four months on Friday after U.S. and British forces seized control of key oil-producing areas in southern Iraq, signaling that the interruption in Iraq oil exports could be short. Perceptions that the U.S.-led war would end quickly grew as the United States blasted Baghdad with massive air strikes and U.S. and British ground forces penetrated deep into Iraqi territory. NYMEX May crude, the new front month, slumped to an intraday low of $26.30 a barrel, the lowest level for prompt crude since Nov. 26, before settling at $26.91, down $1.21, or 4.3 percent, on the day. It peaked at $27.70. NYMEX prompt crude futures have now given up more than $13, or 33 percent, from the 12-year high of $39.99 reached on Feb. 27. With the important oil fields near Basra and a strategic oil port in southern Iraq now in the hands of U.S.-led forces, analysts see a relatively rapid return of some of Iraqi oil exports. "This suggests that Iraq may be able to resume some level of crude oil exports relatively quickly once the military invasion phase of this project is wrapped up and the military occupation phase begins," said Tim Evans, senior energy market analyst at IFR-Pegasus in an afternoon commentary. In London, May crude settled down $1.15, or 4.7 percent, at $24.35 a barrel. British Defense Chief Sir Michael Boyce said all key components of the southern Iraqi oil fields, which pump half the country's output, had been safely secured. Only seven oil wellheads had been torched in the south, less than the 30 previously reported, although oil-filled trenches were also ablaze, he said. British Defense Minister Geoff Hoon said the U.S. and British forces also secured Faw, a strategic port linking pipelines to Iraq's main Gulf export terminal Mina al-Bakr. Bombs and missiles rained on Baghdad on a massive scale as the United States unleased its "shock and awe" campaign aimed at removing President Saddam Hussein from power. Briefing U.S. congressional leaders, U.S. President George W. Bush said on Friday that "we're making progress" in the war on Iraq, though White House officials cautioned that U.S.-led forces still faced many risks. As armored columns raced toward Baghdad, U.S. forces ran into resistance from Iraqi troops near Nassiriya on the Euphrates river, about 235 miles (375 kms) southeast of Baghdad, which halted their advance on Friday. One murky issue, oil traders said, was whether Saddam survived a missile attack Wednesday night that targeted him and other Iraqi leaders in a compound at the heart of Baghdad. Iraq said he did survive but there were reports that he might at least have been injured. ABC News said Saddam was seen being carried out of the rubble on a hospital stretcher wearing an oxygen mask. Traders said a quick end to the conflict would hasten the return of Iraq's U.N.-supervised oil exports, which averaged 1.7 million barrels per day as of the week to March 14. With Iraq's return to the market, however, the markets could be awash in oil as OPEC, led by powerhouse Saudi Arabia, has been ratcheting production up in the past months to cover any interruption of Iraqi exports. The cartel members also raised oil flow to plug shortfalls caused by a long strike in major producer Venezuela, also an OPEC member. Falling with NYMEX crude, NYMEX April heating oil futures settled down 6.88 cents, or 8.3 percent, at 75.56 cents a gallon, its lowest settlement since Dec. 9. NYMEX April gasoline futures settled down 5.74 cents, or 6.3 percent, at 85.25 cents a gallon, the lowest settlement since Jan. 8. In other news, Royal Dutch/Shell <RD.AS> <SHEL.L> declared force majeure for up to 14 days on up to 1 million barrels per day (bpd) of Nigerian crude oil exports because of ethnic violence briefly limiting crude's slippage midday.

Oil: Is the damage done?

March 21, 2003: 5:05 PM EST By Mark Gongloff, CNN/Money Staff Writer

Pre-war surge ends, and prices aren't likely to rise again, though hurt could already be baked in.

NEW YORK (CNN/Money) - So much for the oil crisis. Contrary to the fears of some experts, the start of a U.S.-led war in Iraq, rather than sending oil prices through the roof, has abruptly punctured a mini-bubble in oil.

That sounds like good news for the struggling U.S. economy, but some analysts worry that enough damage has already been done by the recent spike in oil prices to require some help from the Federal Reserve or Congress later this year.

A barrel of U.S. crude oil for delivery in about a month was going for nearly $38 on the New York Mercantile Exchange on March 12. In the nine days since, the price has plummeted nearly 30 percent, closing at $26.91 in U.S. trading Friday.

Prices rose briefly on Thursday, the first full day of hostilities, when reports of burning oil wells in southern Iraq raised memories of the first Gulf War, when Iraqi troops set fire to more than 700 Kuwaiti oil wells as they retreated from U.S.-led forces.

But prices quickly fell again when traders realized very few oil fields were actually burning -- only about 7, according to the latest report from the British military -- and U.S.-led forces had secured many other fields. [For the latest developments in the war, go to CNN.com.]

And many oil analysts doubt that even a repeat of the Gulf War I oil conflagration would send prices back up near $40, where they peaked briefly this year, capping a jump of about 20 percent since the start of the year.

Only major, unexpected disruptions to supply, such as terrorist attacks on oil fields in Saudi Arabia, could send oil prices back to that level, many analysts believe. As long as the damage is limited to Iraq, the Organization of the Petroleum Exporting Countries (OPEC), the group of nations that supplies about half of all U.S. oil imports, should be able to take up the slack.

"It's clear to us that the overproduction of OPEC members at the moment is more than sufficient to compensate for the loss of Iraqi volumes as they currently stand," UBS Warburg oil analyst Matthew Warburton said.

If for some reason OPEC can't fill the gap, Warburton said, the U.S. Strategic Petroleum Reserve (SPR) and the International Energy Agency, which has its own oil reserve for use by a group of 26 Western nations, could easily open their spigots and keep oil flowing.

At the moment, however, the IEA has said it sees no need to release any oil, and the U.S. government seems highly unlikely to tap the approximately 600 million barrels of oil in the SPR.

"World energy supplies are more than adequate to compensate for any disruption," Energy Secretary Spencer Abraham told the Senate Armed Services Committee Thursday. "The response by OPEC and major producers like Saudi Arabia, and if needed, our large strategic stockpiles, will ensure that our economy will have the ample supply of energy it needs." Inventories keep floor under prices

But it also seems unlikely that oil will drop back below $20 a barrel, where prices stood in early 2002, before talk about regime change in Baghdad began in earnest.

Tight world and U.S. inventories of oil and gasoline, the result of an unusually cold winter in parts of the United States, and the long strike in Venezuela, the world's fifth-largest oil producer, should keep a floor under prices, most analysts say. Related stories Bombs fall, stocks rise Tech to play big role in Iraq The 'CNN effect' and you Fed can't figure economy out Crying over crude Sitting on black gold

"The U.S. inventory situation remains extremely tight, with total inventories still falling and gaining no ground on the five-year average," J.P. Morgan oil analyst Paul Horsnell said in a research report Wednesday.

Though OPEC is publicly fretting that prices will keep falling, Horsnell and other analysts suspect prices have actually found their floor and will continue to trade between $25 and $30 a barrel for some time.

And prices may yet move somewhat higher even absent disasters in Saudi Arabia. For one thing, if the latest price drop is driven by a belief among commodity traders that Iraqi oil will be flowing freely soon, the disappointment if that doesn't happen could boost prices.

"The market seems to have pushed far too far, far too fast and on the basis of far too little hard information," Horsnell said in the note. How much economic damage has been done?

High oil and gasoline prices are of great concern to economists, since they weaken consumers' ability to spend on other things and raise costs for businesses. All the big oil spikes in the past 25 years or so have resulted in recessions, and some economists have worried that the recent spike could result in another one.

The recent drop in prices, then, should be something of a relief. But the spike already may have contributed to a dramatic slowdown in growth early this year, helping to drive consumer confidence to lows not seen in about a decade.

"If everything happens just like it did 12 years ago, [oil prices] would continue on a quite rapid decreasing trend, and the worst would be behind us," said BNP Paribas U.S. economist Alexandra Estriot. "However, even if it develops in this positive way, there will be a cost."

Federal Reserve policy-makers decided earlier this week to hold short-term interest rates steady and said they couldn't be sure how much of the recent weakness in the economy will disappear after the war ends.

If longer-term damage has been done by war fears, by the spike up in oil prices, or by more substantive underlying problems, the Fed might have to step in and cut rates further sometime later this year. Congress is also debating tax cuts and spending measures that could be enacted in an effort to help the economy.  

www.upi.com By Hil Anderson UPI Chief Energy Correspondent From the National Desk Published 3/21/2003 7:13 PM

LOS ANGELES, March 21 (UPI) -- Oil prices continued in a virtual freefall, dropping more than $1 per barrel on the New York Mercantile Exchange in unusually bearish trading for a Friday when the vital Persian Gulf was at war as American and British forces rolled through the southern oilfields of Iraq.

NYMEX had been expected to test downward resistance at $27 per barrel and did just that, closing at $26.91, down $1.21 on the day and nearly $9 below the end of last week. Heating oil and gasoline both dipped around 6 cents per gallon.

Traders generally tend to buy up oil on Fridays during times of uncertainty so as not to be caught short if the situation deteriorates and prices soar over the weekend. The past week, however, has been primarily bearish with the market looking ahead to a quick end to the campaign and the erasure of the "war premium" that has tacked around $4 to the price of a barrel of crude and has sent gasoline prices sky-high at the pump.

World wartime oil production this week was only slightly below what it had been last November, Energy Secretary Spencer Abraham said Friday in his latest announcement aimed at reassuring nervous energy markets and consumers.

Abraham said that OPEC production as of Thursday was 26.5 million barrels per day, less than a half-million barrels below output levels seen last November.

"This is despite losing all production from Iraq and also incurring other production losses from Venezuela and Nigeria," Abraham pointed out. "Working with International Energy Agency partners, we continue to monitor global oil market conditions. We appreciate the continued commitment by oil producing countries to ensure stability in the world oil markets."

On the military front, U.S. and British forces secured the southern port of Umm Qasar and were reportedly pressuring the larger oil city of Basra. The Basra, Umm Qasar and the nearby tanker terminal at Mina al-Bakar will give the allies control of Iraq's deep-water harbors on the Persian Gulf.

Umm Qasar is located downriver from Basra and the southern oilfields that allied troops moved into on Friday. Although said to be in a state of disrepair, Umm Qasar was nevertheless functional up until the start of the war and could be ramped up in order to handle both supplies for post-war reconstruction and oil exports that will help pay for the task. Mina al-Bakar was heavily damaged in the first Gulf War but was one of the few oil facilities Saddam Hussein's regime repaired in the subsequent years and is the only Iraqi port on the Persian Gulf capable of accommodating larger oceangoing tankers.

www.alertnet.org 21 Mar 2003 15:55

WASHINGTON, March 21 (Reuters) - U.S. Energy Secretary Spencer Abraham said Friday that world oil production is "consistent and steady" as U.S. and U.K. forces invaded Iraq, based on analysis from the Energy Information Administration.

"EIA data today report that OPEC production as of March 20, 2003, was 26.5 million barrels per day, only slightly lower than the November 2002 figure of 26.9 million barrels per day. This despite losing all production from Iraq and also incurring other production losses from Venezuela and Nigeria," Abraham said in a statement.

"Working with International Energy Agency partners, we continue to monitor global oil market conditions. We appreciate the continued commitment by oil producing countries to ensure stability in the world oil markets," Abraham said.