Iraq stopped its crude exports Friday, as part of its continuing efforts to breach United Nations trade sanctions imposed on that country.
But that move is unlikely to have much immediate effect on world markets and probably won't last long, industry analysts said.
"The market has been on edge in anticipation of Iraq doing something like this," said Robert Morris, energy analyst at Salomon Smith Barney Inc. "Saudi Arabia already has said it can ramp up 1.8 million b/d, and US officials said they may release additional oil from the Strategic Petroleum Reserve (SPR). So the market has pretty well factored it into the current price," he said.
"All Middle East oil has about 2% sulfur content, so increased production (by Saudi Arabia) can compensate for Iraqi crude for a period of time. That makes this a small bobble in supply and demand, rather than a big bobble," said William R. Edwards, president of Edwards Energy Consultants Inc. in Houston.
"The big problem going into winter is the lack of refined product, whether Iraqi crude is available or not," Edwards said.
With US refineries already operating near 100% capacity, he said, "Even if they release more SPR oil to replace Iraqi crude, the industry is just not going to make more (heating oil). There is not enough worldwide refining capacity."
US Energy Sec. Bill Richardson said Thursday that the Clinton administration might release more oil from the SPR to help offset the loss of Iraqi crude. However, Energy Department officials told OGJ Online that no such action and no further official comment on Iraq's action were planned Friday.
Meanwhile, Robert Priddle, executive director of the International Energy Agency, reaffirmed that his group is "ready to take action very quickly if the situation warrants."
He pointed out that some oil-producing countries have significant inventories of crude stored in Europe and other areas close to major markets, "while Iraqi oil exports take 10-30 days to reach their destination."
Shortly after midnight Thursday, Iraq stopped exports of 2.3 million b/d through the ports of Mina al Bakr on the Persian Gulf and Ceyhan, Turkey, under an UN-supervised oil-for-food program. Several tankers reportedly were left lined up at anchor waiting to load Iraqi crude.
Iraq threatened such action Thursday after UN officials rejected its demand that buyers pay a 50�/bbl surcharge into an Iraqi bank account. That would have been a major breach of UN sanctions imposed on Iraq after its ill-fated invasion of Kuwait in 1990. But Iraq had used similar threats recently to force UN officials to agree to its demands to convert its oil export revenues into euros rather than dollars.
"Iraq has made similar noises in the past and has sometimes curtailed exports, but it never lasted long. It doesn't make sense for them not to export oil," Morris said.
Still, a major curtailment of oil supplies at the start of the winter demand season usually would trigger a price spike on international futures market.
But oil futures prices dropped on the New York, London, Tokyo and Singapore markets Thursday in the wake of Iraq's threat. And they continued to fall in afternoon trading Friday in New York and London.
"World oil prices are not determined now by actual supplies, although they can be influenced by supply after a certain lag time," said Edwards. He noted that oil prices continued trending up most of this year despite four production increases by Organization of Petroleum Exporting Countries members in an effort to curb prices.
Back in April 1998, OPEC members began cutting production to shore up a drop in prices. "But it wasn't until after their third production cut more than a year later that prices began to turn around," he said (OGJ Online, Nov. 17, 2000).
In a move to diffuse the potential impact on oil markets, UN officials Friday notified buyers that they could load Iraqi crude now and pay for it later after a new fair market price is set by the UN Security Council.
The current phase of the oil-for-food program expires Tuesday. Security Council members are expected to adopt a resolution early next week to initiate the next phase.
Meanwhile, other sources cited a report from Iraq's official news agency that Baghdad was no longer demanding a surcharge for fear it would make its crude less competitive.
There was no indication Friday whether Iraq's ban on oil exports would affect an agreement it signed Wednesday to swap crude for Indian wheat. That deal is part of an effort to revive the working relationship that existed between the two countries before the Iraq-Kuwait war. But it is subject to approval by the UN Security Council.