Oil price falls as U.S.-Iraq tension eases

David Knott
Senior Editor

The continuing stand-off between Iraq and the U.S. over weapons inspections is bolstering oil prices but not sustaining their recent peak.

As Washington, D.C., talked tough and threatened air strikes against Baghdad, Brent crude oil for prompt delivery reached a recent peak of $16.15/bbl in London trading at close of business on Jan. 29.

At that time, Brent crude for March delivery had reached $16.54/bbl as traders envisioned up to 1 million b/d of Iraqi oil, currently being exported to pay for food under a deal with the United Nations, being prevented from reaching the market.

Since then Russia has led diplomatic efforts to smooth over the latest spat between Washington and Baghdad, and the U.S. has tentatively backed a move to double Iraqi exports under the U.N. oil-for-aid plan.

Since then, by presstime last week, oil prices had fallen, with prompt Brent closing in London at $14.79/bbl on Feb. 3, March Brent closing at $15.36/bbl, and nothing in market fundamentals to prevent further decline.

New plan

The new U.N. plan proposes that Iraq sell $5.2 billion worth of oil every 6 months to pay for food and medical aid badly needed by Iraqi citizens.

This compares with $2 billion worth every 6 months under the current deal.

Iraqi production capacity is presently thought to be 2.3 million b/d, all of which could be required to meet the new U.N. plan. This could be increased quickly by clearing production and export bottlenecks.

Just as the original Iraq/U.N. deal met with the most resistance in Baghdad, so the expanded program has been received coolly. Iraqi officials reportedly called the new plan a plot by the U.S. and U.K. "...aimed at stealing more than 50% of Iraq's oil resources."

CGES view

Julian Lee, oil analyst at London's Centre for Global Energy Studies, admits to being bemused by the Iraq/U.S. situation but reckons it is about the only good thing going for oil prices at the moment.

"On the one hand," said Lee, "it looks as if things could easily escalate out of control. On the other hand, it is difficult to see who would benefit from U.S. air strikes. It seems to be a no-win situation.

"Bombing barracks and weapons sites in Iraq would mean the end of weapons inspections and U.N. involvement on the ground. We are seeing very little sign that the Iraqis will back down. The situation could go either way."