COMMODITIES: Oil Prices Sink as Iraq Remains in Market

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Dec 17 1998 (IPS) - The two massive U.S.-British air strikes against Iraq have had little to no impact on the oversupplied and weakened global petroleum market, which saw prices sink Thursday in a partial correction of the rise caused by the Wednesday night attack.

“The effect of the bombings was only pyschological, and very short,” oil specialist Alberto Quiros told IPS in Caracas, because the reality is that supply is two million barrels per day (bpd) too high – a situation that would not be resolved by an eventual temporary withdrawal of Iraq’s output.

Added to that overproduction in a market where demand has been depressed all year long and analysts forecast a global recessive phase are stockpiles of more than seven billion barrels – close to the maximum storage capacity of consumers.

The stockpiles exceed 90 days of consumption, and “are not even being drained by warnings that another tough winter is on its way,” said Quiros.

North Sea crude fell 44 cents to 10.88 dollars Thursday, after rallying 80 cents Wednesday in response to the imminence of the first strike against Iraq.

With winter approaching in the industrialised North, prices stand at the lowest level seen in 30 years, and producers have resigned themselves to an at least three-year period of low prices.

For the time being, Iraq’s withdrawal from the market has not occurred, because its oil installations have not been affected by the bombing. On Thursday Iraqi oil continued to be shipped out of Gulf ports.

Iraq’s sales of around 1.8 million bpd currently account for three percent of the global total, according to a United Nations humanitarian agreement.

“The signs are that an interruption of supply has not occurred, and the attacks do not seem to be aimed at production or Iraqi deliveries,” said a trader in London.

Production and deliveries could be brought to a temporary standstill by the attacks or a decision by London or Washington to block access by tankers to the ports out of which Iraq’s oil is shipped.

But any such interruption of output would be compensated later, which according to Quiros means that any mild psychological impact on prices would be counteracted by the effect of Iraq’s return to the market.

British Prime Minister Tony Blair’s confirmation that the strikes would continue for several days failed to generate any jitters among traders in today’s buyer’s market.

The strikes, which according to some analysts could last until Sunday, when the holy month of fasting, Ramadan, begins in the Muslim world, did have an impact however on the fourth meeting of the members of the Riyadh Pact, which took place Thursday in Madrid.

The energy ministers of Saudi Arabia, Mexico and Venezuela were seeking some kind of formula to give off a signal that would at least check December’s plunge in prices, which has been aggravated by the negative ingredient of constant swings.

Since their first meeting in Riyadh on Mar. 22, the three countries have pressed for a voluntary, collective supply cut by the 11 members of the Organisation of Petroleum Exporting Countries (OPEC) and independent producers like Mexico, in an attempt to shore up prices.

Their efforts translated into an OPEC commitment to a 2.6 million bpd cutback since July – with February levels of production as a reference – and a 500,000 bpd supply reduction by Mexico, Norway and several other exporters.

But that supply curb was largely counteracted by the production of an additional 1.4 million bpd by marginal exporters, which discouraged those participating in the pact. Independent observers found that in November, OPEC produced one million barrels above the agreed-upon level.

OPEC economies, which are highly dependent on petroleum, have been devastated by the fall in revenues caused by the crash of prices. Initial estimates indicate that the organisation’s 11 members will have taken in 70 billion dollars less this year.

In the case of Venezuela, oil revenues fell 63 percent this year, to 12 billion dollars.

In Quiros’ view, even worse than the slump is the erratic behaviour of prices, which hampers forecasts of revenues needed for planning budgets. “The zigzag, where during one week they stand at 10, the following week at eight, and the next at nine, creates uncertainty for petroleum-dependent countries, which is very harmful in the end because it impedes planning,” he said.