Oil Prices Fall As War Begins
Oil prices tumbled in early trading Thursday after the United States launched air attacks on Baghdad. Futures contracts in New York fell by as much as $1.88 a barrel before recouping much of their initial losses.
The Organization of Petroleum Exporting Countries sought to calm oil markets by announcing that its members have 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's 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.
April contracts of U.S. light, sweet crude fell to a low of $28.00 a barrel in after-hours trading before rebounding somewhat to $29.25, down 63 cents from Wednesday's close.
"It dropped like a stone," said Peter Gignoux, head of the petroleum desk at Salomon Smith Barney.
In London, May contracts of North Sea Brent crude fell to $25.53, down $1.22 a barrel. Brent bounced back, trading 2 cents higher at $26.77 by midday.
Some traders anticipated firmer Brent prices on concerns that the war with Iraq might take longer than many had predicted.
However, Gignoux said he believed the so-called war premium built into prices had yet to fully disappear. Many analysts argued before the start of hostilities that fears of a disruption in Iraqi oil supplies had added more than $5 to the price of each barrel.
"The market doesn't look particularly strong at this juncture," he said.
"I don't think there's any more 'war premium,'" said Phil Flynn, a senior analyst at Alaron Trading in Chicago. "Now we're building a 'peace premium.'"
Over the past three weeks, prices for U.S. light, sweet crude have fallen from their post-Gulf War high of $39.99 a barrel, reached on Feb. 27.
OPEC officials have indicated often in recent weeks that the group would 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.
In light of the hostilities in Iraq, OPEC announced that its Secretary-General Alvaro Silva would hold a news conference at the group's headquarters in Vienna, Austria, at 1500 GMT.
The United States and other IEA members view OPEC as the first line of defense in preventing a supply shortage arising from the war.
"We appreciate steps producers have taken to prevent any shortage in world oil supply — earlier this year and again now. We are determined to promote stability in world oil markets and remain ready to reinforce producers' efforts should the need arise," the IEA's executive director Claude Mandil said in a statement.
The IEA, set up after the Arab oil embargo of 1973, recently suggested it might authorize its members to release oil from their strategic reserves if a conflict affected crude shipments from the Persian Gulf. OPEC worries that such a step would dilute its own influence over crude supplies and might cause oil prices to plunge.
Thorsten Fischer, an oil economist at Economy.com agreed that there is a chance crude prices will reverse course "if the conflict escalates."
"Oil prices would rise if Saddam used chemical or biological weapons or tried to draw Israel into the war in order to cast it as a struggle of Arab Muslims and the Western world," he said. But much depends on whether the U.S. can successfully protect the oil fields in Iraq and neighboring countries.
Citing a "trusted source," Banc of America Securities analyst Tyler Dann said Wednesday that coalition troops are "experiencing more success in securing the fields in the southern no-fly zone," an area that represents about 60 percent of Iraqi production.
Securing fields located in the northern no-fly zone, "will likely take more time," however, because of Turkey's refusal to allow U.S. troops to be stationed there has "hampered the ability of coalition forces to secure those fields," Dann said.
Iraq has a production capacity of 3.2 million barrels per day — about 1 million barrels per day of which is located within the northern no-fly zone, he said.