Iraqi Oil Fires Goose U.S. Crude Prices
Oil prices jumped Thursday on reports that oil wells in southern Iraq were burning out of control after apparent acts of sabotage.
The market reacted to reports that fires near the southern Iraqi oil center of Basra had been burning for several hours. Witnesses in Kuwait saw orange flames in the sky across the border following series of explosions, and Defense Secretary Donald Rumsfeld said three or four oil wells may have been set afire. There was no immediate confirmation of the reports.
Energy analyst Peter Zeihan of Stratfor, an intelligence-consulting group based in Austin, Texas, however, said he hasn't seen indications that Iraq has purposely sabotaged its own fields.
"If they do — they'll do it big time," he said, adding that the Iraqis will want to cover Basra with smoke so their military will be shielded from coalition air strikes.
Zeihan said the oil fields at Rumaila are of special importance. They are Iraq's second-largest producing field, geographically behind Kirkuk in the north, and account for about half of Iraq's production of around 2.4 million to 2.5 million barrels per day, he said.
In London, May contracts of North Sea Brent crude surged to $27.35 on the news, up 60 cents a barrel, after hitting an early morning low of $25.53.
April crude Thursday jumped to a high of $30.60 a barrel on the New York Mercantile Exchange, before settling down somewhat. Before news of the fires, the contract had traded as low as $28.90.
The Organization of Petroleum Exporting Countries had sought earlier to calm oil markets by announcing that its members had pledged to maximize output to make up for any disruption in crude exports from Iraq.
"I am herewith reiterating OPEC's resolve to make up for any supply shortfall resulting from developing events. To this end, member countries have pledged to use, in the interim, their available excess capacities to ensure continued supply," OPEC president, Abdullah bin Hamad Al-Attiyah, said in a statement.
Iraqi crude exports, totaling 2 million barrels a day, are expected to cease as the war intensifies.
OPEC officials have promised to pump more oil if necessary to ensure ample supplies. OPEC's statement Thursday was an explicit commitment to do so.
"While OPEC will continue to closely monitor and react to market developments, it is hoped that the measures taken will contribute to market stability and support world economic recovery," Al-Attiyah said.
Oil prices had been falling Thursday until reports of the well fires.
"The removal of uncertainty has led to a reduction in the risk premium by as much as one half" — but not a shot needed to be fired for this to happen, said Thorsten Fischer, an oil economist at Economy.com.
"It was enough that the market was convinced that the waiting was going to be over soon," he said. "That is why the actual start of the campaign did not make that big of a difference."
Oil prices have dropped dramatically since the U.S. made its decision to forcibly disarm Iraq, with investors expecting the war "to go well for the U.S., Iraqi oil fields to be preserved, and a safer, friendlier oil trade to emerge as a result," said Todd Hultman, president of Dailyfutures.com.
Most oil traders are "acting as if the outcome of the war is in the bag, but clearly it is not — at least not yet," he said.