www.chron.com March 19, 2003, 4:13PM Reuters News Service

LONDON - World oil prices fell again today, deepening a five-day rout that has knocked 21 percent off the cost of a barrel as dealers brace for an impending U.S. invasion of Iraq.

Prices have tumbled $8 in the last five trading days as dealers bet hard on an easy U.S.-led victory in military action they expect to cause only a brief disruption to Middle East oil flows.

U.S. crude futures for May delivery dropped 69 cents, or 2.3 percent, to $29.36, following Tuesday's nine-percent drop. The April contract, which saw only thin volumes ahead of its expiry Thursday, fell $1.79 to $29.88, the lowest level since early January.

International benchmark Brent crude oil dropped 50 cents, or 1.8 percent, to $26.75 a barrel in London, hitting a 3-month low.

"Prices have behaved as they would do after a very quick war, involving no destruction of oil infrastructure and fairly immediate post-war post-war political stability both inside Iraq and elsewhere," said Paul Horsnell of J.P. Morgan bank in a report.

The U.S. deadline for Iraqi President Saddam Hussein to quit Baghdad or face war stands at 8:00 p.m. EST Wednesday , but Saddam has already rejected the ultimatum.

All international U.N. staff, including weapons inspectors, have been evacuated from Iraq. Kuwaiti sources said U.S.-led troops had already moved into the demilitarized zone that straddles the border with Iraq.

Fears of a strike on Iraq and wider disruptions to Gulf supplies drove U.S. crude close to $40 last month, approaching the $41.15 record set in the buildup to the 1991 Gulf War.

During that war, prices dropped from over $30 to $20 when U.S.-led forces launched an offensive to expel Iraq from Kuwait, once it became clear Iraq would not harm oilfields in Saudi Arabia, the world's top exporter.

Dealers said the five days of falls had removed some of the "fear premium" in oil prices. Saudi Oil Minister Ali al-Naimi said in an interview published Wednesday it could be as large as $10.

"The fall indicates the market is looking beyond war. People are not expecting Saddam to have a scorched-earth policy," said Han-Pin Hsi at Deutsche Bank in Hong Kong.

Prices could easily spike back up if Iraq torches its own oilfields, or the conflict is drawn out.

An invasion will almost certainly close Iraqi crude output of 2.5 million barrels per day (bpd) and its southern neighbor, Kuwait may also be forced to shut some fields near its border.

Oil giant Royal Dutch/Shell said Wednesday it had closed an oilfield in Iran, close to the Iraqi border, because of its proximity to the potential conflict zone.

"The fall occurred before the start of war, and oil traders have no inside track on the war and its implications," said J.P. Morgan's Horsnell.

"Prices have been moved by a speculative bet of staggering proportions," he added.

IRAQ EXPORTS SLOW

Iraqi oil exports, ranked seventh largest in the world, have already slowed dramatically this week because most Western companies are unwilling to take the risk on uncertain supplies.

The president of OPEC spoke to the West's energy watchdog, the International Energy Agency, and told it the cartel would do its best to fill any supply gap caused by war.

Many members have already increased supplies to their full capacity and analysts believe any prolonged outage of Iraqi supply, with some impact on Kuwait, would test the group's spare capacity to the limit.

A cold northern winter and prolonged supply hitch from Venezuela have already drained commercial stockpiles to historic lows in the world's top oil consumer, the United States.

The United States is ready to release oil from its strategic reserves to prevent a severe supply interruption, but only as a last resort if OPEC producers are unable to overcome the shortage.

The U.S. Energy Department said Wednesday a halt in Iraq's oil exports would not automatically trigger a release of the U.S. Strategic Petroleum Reserve.

The spokesman said no decision was "imminent" on whether to release oil from the stockpile. Any decision would probably be taken in tandem with the International Energy Agency, which monitors government oil stocks in 26 industrialized nations.

These stocks, added to reserves held by industry, could cover those countries' total import needs for 114 days.

www.rferl.org By Michael Lelyveld

Despite a meeting with Saudi Arabia, Russia can do little to pump up oil production or stabilize the world energy market during a war with Iraq, experts say. The country has already reached its export limit, and Moscow now seems more worried about what Saudi Arabia will do to prevent a sudden price drop after the war ends.

Boston, 19 March 20003 (RFE/RL) -- A meeting between top Saudi Arabian and Russian energy officials has shown how little Moscow can do to keep oil prices in check during the Iraq crisis, analysts say.

Last week, Saudi Petroleum Minister Ali bin Ibrahim al-Naimi flew to Moscow to meet with Russian Energy Minister Igor Yusufov, where they reached an agreement on stabilizing oil prices, according to Russian and Saudi news agencies.

Al-Naimi's three-day visit may have given the market some assurance that the world's two biggest oil producers are cooperating to prevent a price spike on the eve of war with Iraq.

But experts say that only Saudi Arabia has the ability keep prices from soaring out of control, while Russia appears stuck with the same limits on pipelines and ports that have kept its industry in a straitjacket for months.

The situation may bring an abrupt end to Russia's claims over the past year that it has the power to offset actions by the Organization for Petroleum Exporting Countries and provide alternate supplies to the West. The Russian government has promoted the country's oil-producing capacity in proposing energy partnerships both with Europe and the United States.

But Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said, "In terms of Russia, they're producing flat out, and they have some infrastructure problems."

Ebel pointed to the restrictions of Russian pipeline capacity and the continuing feud between independent oil producers and the Russian state pipeline monopoly Transneft as limiting factors.

In what could be a classic case of bad timing, Russia's second-largest oil company Yukos said this week that it would cut production by 12 percent because of pipeline problems, the Moscow-based investment bank Troika Dialog reported. Transneft lowered its intake of Russian crude by 9 percent starting on 7 March, according to the brokerage.

Speaking of the Russian oil companies, Ebel said, "They've been somewhat successful in using river and rail to get around the pipeline problems, but there's a limit to that."

Ebel also noted that Saudi Arabia has already been pumping more than 9 million barrels of oil per day for a sustained period to offset low output in Venezuela and slim U.S. inventories. While the country can push to more than 10 million barrels per day, Ebel said there is concern about how long it can do so.

In the worst case, the image of the world's two top oil producers having so little power to raise output may be reason for worry.

Ebel said, "It doesn't give you that warm, fuzzy feeling, does it?" But in the early part of the week, world oil prices appeared to be headed down, not up, even as war with Iraq loomed.

One reason is a report that Saudi Arabia, unlike Russia, has been quietly saving up oil for a rainy day. "The New York Times" reported this week that the country has set aside 50 million barrels of oil that could cover the loss of Iraqi exports for about a month.

Fareed Mohamedi, chief economist of PFC Energy, a Washington-based consulting firm, said that Iraqi exports have already stopped, but the world market has previously "priced in" the stoppage because Iraqi production has been undependable for some time.

The extra Saudi oil is on top of the 600 million barrels in the U.S. Strategic Petroleum Reserve, as well as other stockpiles in most industrialized countries.

Mohamedi said of the new Saudi pool, "That's just sending a signal to the market, don't worry about any potential stoppages." Mohamedi believes the Saudi-Russian meeting was more likely about the risk of low oil prices rather than high ones. Both countries are concerned that the market may already be oversupplied and that prices could drop too far once the crisis subsides.

Mohamedi said, "I think the Russians may have worried that it is going down too fast." Russian officials fear that prices could plunge quickly below their target price of $25 per barrel, blowing a hole in the government's budget. The consultations with Saudi Arabia are likely to have focused on what to do after, rather than during, the war.

While gasoline prices in Western countries have climbed, crude-oil prices in the early part of the week fell from the high $30 range to the low $30 range on confidence that the U.S.-led coalition would end the uncertainty and win the war. The approach of spring in the Northern Hemisphere also ushers in the traditional drop in second-quarter oil consumption, easing price pressure.

Despite those factors, experts warn that prices could still go either way. In recent weeks, warnings of an oversupply have been balanced by a "war premium" of $5 to $6 per barrel, which could now be melting away.

Mohamedi said, "If the war goes really well, then the war premium disappears." But it could also rise suddenly in case of damage to oil fields outside Iraq.

Mohamedi said sabotage of the Iraqi fields would be a long-term concern, but the loss of supply in the short term has already been factored in. Damage to fields in Kuwait or Iran could add $10 to oil prices, he said. Destruction of the Saudi fields would be the worst case, driving prices over $60 per barrel. And Mohamedi said that if that happens, the eventual exhaustion of strategic petroleum reserves would be the market's "doomsday scenario."

ogj.pennnet.com Marilyn Radler Economics Editor

HOUSTON, Mar. 19 -- The oil market is heading into a period of heightened uncertainty with low stocks and limited spare production capacity, the International Energy Agency warned in its latest Oil Market Report. These factors reduce flexibility and limit the system's ability to respond rapidly to changing circumstances.

The Paris-based agency reported that worldwide crude oil production surged 1.96 million b/d in February. Members of the Organization of Petroleum Exporting Countries added 1.5 million b/d, as output from Venezuela rebounded another 850,000 b/d, and Saudi Arabia increased exports 330,000 b/d. This meant that OPEC spare capacity fell to 1.7 million b/d in February, and Iraqi output for February was 2.49 million b/d

Addressing supply interruptions in light of sparse inventories, IEA commented, "Recent mergers and acquisitions may have increased the ability of refiners to test the limits of indicative minimum operating stocks. And Venezuela may yet surprise us with a sharper than expected increase in supply. But potential political turmoil in Nigeria cannot be forgotten."

The agency noted that some producers have positioned their stocks near water close to consuming markets, while others have land-based inventories capable of supplementing production. If they are available, these stocks could cushion a supply disruption.

Inventories Industry oil stocks in member countries of the Organization for Economic Cooperation and Development are tight and trending around minimum operating levels in key markets, however. Forward demand cover by OECD oil stocks came to 50 days at the end of January, as storage volumes were down 211 million bbl from a year earlier.

Crude stocks declined in the US but held flat in Europe during January. There were few incentives for regional refiners to purchase crude above operating requirements. Heavy refinery maintenance in the US eroded some crude demand, and although strong cracking margins for light sweet crude bolstered throughputs in Europe, backwardation in the paper markets limited inventory holdings, IEA said.

Stocks of gasoline in the OECD grew by 4 million bbl in January. The strongest gains occurred in Europe but were modest in light of waning demand, and exports to the US reached 2 million tonnes. US gasoline stocks slipped marginally despite strong demand.

Distillate stocks in North America plummeted as cold temperatures hit the northeastern US. Meanwhile, gas oil stocks in Europe fell not on domestic demand but on pull from US markets.

Refining margins surge Product price increases outpaced crude oil price gains in February, strengthening margins substantially in the four major refining centers. Cracking margins showed greater improvements than hydroskimming margins in Rotterdam, the Mediterranean, and Singapore.

Cracking margins for both Brent and West Texas Intermediate crude increased on the US Gulf Coast. The monthly gains in average margins hide intra-month fluctuations, though. IEA reported that the US Gulf Coast cracking margin for WTI during February averaged $4.54/bbl, up from $1.93/bbl a month earlier. From late January through the second week of February, the margin improved dramatically and then fell steeply for 2 weeks before rising sharply at the end of the month. The poor mid-February margins rebounded as key product price gains—in heating oil and jet fuel—surpassed crude oil price gains at the end of the month.

Contact Marilyn Radler at Marilynr@ogjonline.com.

www.boston.com By Associated Press, 3/19/2003

NEW YORK -- The price of oil plunged 9 percent yesterday, falling to its lowest level in more than two months as traders bet that the impending United States invasion of Iraq will go smoothly and that global stockpiles of crude are sufficient to offset any supply disruptions.

The April futures contract fell $3.26 to $31.67 a barrel on the New York Mercantile Exchange, the lowest close since Jan. 8.

However, with US supplies low and uncertainty in the Middle East high, traders said petroleum prices likely will remain volatile in the short term.

''This thing could go right back up,'' said Tom Bentz, an analyst at BNP Paribas in New York. ''We're still vulnerable because inventories are tight.''

The most recent Energy Department data showed commercial stockpiles of crude at 269.8 million barrels, 18 percent below year-ago levels. Supplies have dwindled as a result of high demand for heating oil in the Northeast and fewer imports from Venezuela, whose oil industry was crippled for months by a nationwide strike.

Yet Bentz and other traders expressed confidence yesterday that the loss of Iraqi crude could be made up elsewhere and that the US government will tap its own 600 million-barrel stockpile, the Strategic Petroleum Reserve, in the event of a supply emergency. European nations have their own stockpiles that could help make up for any supply shortages resulting from war, which could begin as early as tonight.

Furthermore, industry watchers said OPEC producers -- with the exception of Iraq and Venezuela -- all are pumping over their quotas, eager to take advantage of the high prices. That extra supply could hit the market just as demand for gasoline, heating oil and other fuels drops to seasonal lows.

''There's quite a bit of oil in vessels and it's now beginning to hit the consuming areas,'' said Leo Drollas, chief economist of the London-based Center for Global Energy Studies. He said Saudi Arabia may have as much as 50 million barrels in storage or en route to markets.

The United States consumes roughly 19.5 million barrels of crude a day and more than half of that is imported. Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York, said traders are coming to the conclusion that the world has enough oil to meet demand, even assuming that Iraq's daily production of 2 million barrels is taken out of the equation.

Yesterday's decline in oil prices also drove down wholesale prices for gasoline and heating oil. Heating oil for April delivery fell 5.79 cents to close at 85.78 cents a barrel, while gasoline futures dropped 6.52 cents to close at 96.19 cents a gallon.

www.thestar.com Mar. 19, 2003. 07:56 AM STEVEN THEOBALD BUSINESS REPORTER

The expectation of a quick and clean victory following a U.S.-led invasion of Iraq prompted crude oil prices to fall 9.3 per cent to $31.67 (U.S.) per barrel on the New York Mercantile Exchange.

That capped a 16 per cent decline in the past four trading days.

Assuming all goes well on the battlefield, traders are expecting crude prices to reach about $25 per barrel by mid-April, said Brian Prokop, an analyst with Calgary-based oil & gas investment dealer Peters & Co.

The market simply is starting to extract the war premium built into oil prices, he said.

"These are stupidly high prices," Prokop said. "We had $26 oil in September of last year then Bush started saying, `We are going into Iraq,' then boom."

Following the 1991 Gulf War, oil prices plunged after hitting highs above $40 a barrel.

Things are a bit more complicated this time around, Prokop said.

In particular, OPEC countries already are running at ramped-up levels, leaving far less spare production capacity to meet any possible shortfalls.

As well, inventory levels are low and Venezuela is still struggling to regain its pre-strike output of 3 million barrels a day, Prokop said.

"You have a couple of more wrinkles that are arguably bullish for oil prices."

Stock markets took a breather yesterday after posting big gains Monday, as all major North American indices gained about half a percentage point.

"The market is having a reality check," Peter Cardillo, chief strategist at Global Partners Securities Inc., told Reuters.

"We have come up sharply on the pretense that we will have a short war but we are not engaged in war just yet. Once the bombs start to fall, the progress of the war will be noted."

While uncertainty over Iraq has been lifted, the outlook on interest rates got a whole lot fuzzier yesterday.

Following its scheduled policy meeting, the U.S. Federal Reserve left its trend-setting interest rates unchanged, as expected. The surprise came in the Fed's accompanying statement.

The Federal Open Market Committee refused to provide an assessment of the risks the U.S. economy faces.

Given geopolitical unknowns, "the committee does not believe it can usefully characterize the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth," the statement read.

"It's striking," said Marc Lévesque, senior economist at the Toronto Dominion Bank. "It says basically they don't have a clue."

Stock market investors also would be wise to realize that the future is uncertain, suggested Roger Mortimer, a portfolio manager with San Francisco-based AIM Funds Management Inc.

The overthrow of Saddam Hussein won't solve all the U.S. economy's underlying problems, Mortimer added.

"There has been the tendency to associate Iraq with any number of ills affecting the U.S. economy."

Following the 1991 Gulf War, stock markets soared as much as 30 per cent over the year.

But this time around, corporate earnings for the first quarter of 2003 are expected to be quite weak, Mortimer warned.

"If the markets are feeling optimistic and the Iraq situation is behind us, they may shrug that off and go higher, but there could be hiccups."

Earnings are expected to improve, but it could take several more months, Mortimer said.

"The stock market's ability to rally at the back end of the year is really a function of economic recovery."

Ron Meisels is far more confident the current bounce in stock prices is the beginning of a bull run.

Meisels, a technical analyst with Montreal-based NA-marketletter.com, is predicting that North American stock markets will rise between 18 and 25 per cent by year's end.

A resolution of the Iraq situation is the trigger but the key is that significant uncertainty has been removed from investors' minds, Meisels said.

"If Iraq wasn't there, we would have found another reason to worry," he said.

"Bull markets always climb a wall of worry."