Oil prices recorded their biggest ever 1 day collapse in response to initial reports of success in massive U.S. led allied air strikes that began Jan. 16 against Iraqi military installations in Iraq and Kuwait last week.
In addition to reports of a surprisingly ineffective first military response from Iraq, the market was calmed by emergency supply steps by the International Energy Agency and the U.S. government.
Meantime, refiner/marketers in the U.S. and Europe quickly took steps to freeze product prices and ensure adequate supplies amid uncertainty over the scope of Persian Gulf fighting.
With sufficient supplies on the world market, some analysts at presstime last week were predicting a further collapse in oil prices to the mid-teens if the war is resolved quickly with no significant military or terrorist actions disrupting world oil supplies.
Offshore oil producing facilities in Saudi waters close to the border with occupied Kuwait were reportedly shut down as a precautionary measure as the first waves of aircraft attacked Iraq and Kuwait. Saudi Aramco northern area operations produce from Safaniya, Zaluf, and Marjan fields. Indications were that as much as 1 million b/d delivered through the Tanajib onshore terminal could have been temporarily shut in.
From the northern terminal, oil moves overland to storage and tanker loading facilities at Juaymah and Ras Tanura. Both terminals were operating normally at presstime last week.
PRICE COLLAPSE
West Texas intermediate on Houston and New Orleans cash spot Jan. 16 jumped $6-7 to as much as $40/bbl after reports war had broken out.
But spot WTI quickly plummeted to close at $32/bbl Jan. 16 after early reports indicated little threat to Saudi oil facilities or of a wider, protracted war.
On the New York Mercantile Exchange, crude futures for February delivery closed Jan. 16 at $32/bbl, up $1.93 on the day, before there was word shooting had started. Nymex crude plunged the next day, trading at $20.30/bbl at midday.
In Tokyo, traders pushed WTI futures to $40/bbl on word of war in the Persian Gulf early Jan. 17, but WTI slipped about $4 during the day.
The fall was even more dramatic in Europe at OGJ presstime last week with the growing likelihood that there would not be a major oil supply disruption.
The first news of air strikes against Kuwait and Iraq sent the forward price for Brent blend from a Jan. 16 close of about $30/bbl in London, up $2 on the day, and to $31-32/bbl in the Far East, where markets were in full swing as the first wave of allied aircraft went in.
First reports of successful air strikes and little Iraqi retaliation rapidly put crude prices into retreat. IEA's announcement it will activate the emergency contingency plan to make 2.5 million b/d of oil available to the market from stocks within 15 days sped the Brent price skid to close Jan. 17 at $20.75/bbl. The agency plans to meet again soon to reassess the market situation.
MARKET RESPONSE
London traders said the apparent near destruction of Iraq's air force had largely removed the threat of serious damage to Persian Gulf export terminals vital to keeping oil flowing to market.
But there also were words of caution. If Iraq's capability to strike by air has not been virtually eliminated, production, storage and export facilities could still be in danger and low prices might be short lived.
However, industry sources expect the IEA stock drawdown to prevent a return to the high price levels seen in fall and early winter.
The only demonstration of the vulnerability of oil installations to military action came in the Neutral Zone, where Iraqi artillery bombarded Arabian Oil Co.'s (AOC) 30,000 b/d refinery and set a crude storage tank afire. U.S. air strikes quickly put the Iraqi artillery out of action. AOC is a Japanese operated joint venture.
IEA ACTION
IEA notified all member governments the 2.5 million b/d contingency plan should be activated within 15 days. All IEA members plus Finland, France, and Ireland will participate in the plan.
Of the total, 2 million b/d will be made available by drawing down stocks. Demand restraint will account for a further 400,000 b/d, and 100,000 b/d will come from fuel switching and surge capacity.
IEA also recommended that oil companies continue to draw on commercial stocks and that companies and consumers exercise restraint in purchases.
It reiterated that there need be no concern about oil shortages because world markets are comfortably supplied and additional refinery capacity is available.
But the outbreak of hostilities could lead to heightened uncertainty and volatility in the market, it added. The measures are designed to make available additional oil to meet any possible temporary shortfall that might occur.
Industry sources said the 2.5 million b/d will come from a 1.125 million b/d stockdraw from the U.S., 187,000 b/d from Germany of which about 80% will come from a stockdraw. Japan with 350,000 b/d and the U.K. with 120,000 b/d will meet their obligations entirely through stockdraws.
But it was unclear how Italy and Canada will meet their full obligation. About half of Italy's 130,000 b/d is to come from inventories, but there was doubt whether Canada could achieve drawing 115,000 b/d from stocks.
Britain's Department of Energy last week consulted with oil companies on how stocks are to be drawn down but said ultimately it would be a decision made by the companies.
In France, oil companies have agreed to a freeze on oil prices, and the government asked companies to reduce commercial stocks. Government held strategic stocks will be used only as a last resort.
European companies said the 15 day breathing space will give the industry time to evaluate whether there is a real threat to supplies and to implement the stockdraw in an orderly fashion.
EUROPIA RESPONDS
European Petroleum Industry Association (Europia), representing most major private and state oil companies in Europe, reaffirmed IEA's optimistic view of the supply situation.
There is no reason to be worried about petroleum products shortages, it said in a Jan. 17 statement.
Thanks to the efforts of the Organization of Petroleum Exporting Countries the supply of crude oil is greater than before the crisis, Europia noted. In combination with a decrease in consumption, this has resulted in a stockdraw in fourth quarter 1990 smaller than the usual winter pattern.
The association also noted IEA's decision to trigger an early release of 2 million b/d of stocks and make available another 500,000 b/d through demand restraint and other measures came as the winter demand period was coming to an end.
U.S. SPR DRAWDOWN
Because of war with Iraq, President Bush ordered the sale of 33.75 million bbl from the 585 million bbl Strategic Petroleum Reserve on the U.S. Gulf Coast.
That drawdown during 30 days will average 1.125 million b/d.
Bush also ordered the Treasury secretary to waive Jones Act provisions requiring use of U.S. flag vessels to move crude between U.S. ports if they are moving SPR oil.
Energy Sec. James Watkins said there should be no immediate oil shortages. "By drawing on our strategic stocks, the U.S. is working in close cooperation with its partners in the International Energy Agency," he said. "Our purpose is to take precautionary action early and in doing so counter any possible disruption of supplies from the Persian Gulf."
Watkins said 13 other nations also will draw down stocks.
"Acting collectively, the U.S. and its allies intend to reassure the world market. Consumers should not have any concerns about the availability of petroleum and petroleum products. The SPR was envisioned for exactly the situation we have today. Now is the time to begin taking advantage of the investment we have made in it."
DOE last week was preparing to issue a notice of sale, specifying the types and location of crude it will offer for sale from storage sites in Texas and Louisiana
First oil from the SPR could enter the U.S. market within 16 days, but because of normal pipeline and vessel scheduling requirements, most of the oil is expected to be delivered late in February or in March.
Watkins said the 1.125 million drawdown rate is about one third of the SPR's maximum oil distribution capability of 3.5 million b/d that could be called upon "should the situation warrant in the future."
REFINERS' ACTIONS
U.S. refiner/marketers froze products prices and took emergency supply allocation measures in response to the outbreak of war.
Mobil Corp. froze until further notice all petroleum products prices. Mobil implemented Jan. 15 a ratable lifting program for gasoline and heating oil because some of its terminals had been hit by withdrawals greatly exceeding local demand. Basing the program on contract entitlements, Mobil asked customers to restrict liftings to 100% of contract volumes.
That will assure customers access to larger volumes than most had been lifting and help temper speculative hikes in oil demand and prices, it said.
Other allocation programs were in place or planned by Ashland Oil Inc., Conoco Inc., Marathon Oil Co., Phillips Petroleum Co., and Texaco Inc.
Texaco, Amoco Corp., ARCO, Chevron Corp., Conoco Inc., Shell Oil Co., Sun Refining & Marketing Inc., and Unocal Corp. also froze prices.
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