Oil prices fall after Baghdad air strikes
The U.S. and U.K. governments called off their air strikes on Iraq after 4 days, but even before the campaign ended, oil prices were once again weak.
As the first missiles rained down on the Baghdad area last week, oil prices briefly leaped up sharply for the first time in months, but market realities got the upper hand before 24 hr of bombardment had passed (OGJ, Dec. 21, 1998, Newsletter).
In the hours before the first attack on Dec. 16, uncertainty encouraged traders to pay up to $11.34/bbl for February-delivery Brent crude. At close of London trading on Dec. 17, February Brent stood at $10.57/bbl, and by close of trading the following day it had trickled below the $10/bbl mark once again, to close at $9.98/bbl.
By mid-afternoon Dec. 21, February-delivery Brent had fallen to $9.73/bbl. An official at London's International Petroleum Exchange said the decline was expected to continue.
On Dec. 18, Reuters reported that U.S. Defense Sec. William Cohen said a "limited" attack was carried out on a refinery in southern Iraq to stop "illegal shipment" of oil out of Iraq. Cohen said Iraq uses the Basra refinery to process and export oil in violation of the United Nations-sponsored oil-for-aid program. He did not say whether the Basra refinery was destroyed or how much damage was done to it, nor could he confirm rumors that an oil tanker had been attacked in the Persian Gulf.
Reuters noted that Iraq has been accused by the U.S. of smuggling up to 100,000 b/d of crude oil and petroleum products to Turkey by truck; to India and Pakistan along the Gulf Coast; to Iran across the Fao Peninsula in barges; and to Dubai in small tankers. The U.S. Department of Energy estimated that the oil and products shipments may have provided Iraq with up to $700 million/year in revenue, in addition to legitimate supplies to Jordan.
The Basra refinery was described as Iraq's third-largest, handling up to 126,000 b/d of crude oil. The energy department estimated Iraq's total refining capacity at 350,000 b/d, while Iraq claims it has capacity of 700,000 b/d.
London's Centre for Global Energy Studies (CGES) said that neither the bombing of Iraq nor the meeting of the oil ministers of Saudi Arabia, Vene- zuela, and Mexico in Madrid have made a significant impact on oil prices.
"There is little reason to believe," said CGES, "that the bombing of Iraq will halt the oil-for-food program, and, should it be disrupted, it will not be for long. As for Madrid, Venezuela's pledge to extend the existing oil output cuts until the end of '99 and promises from the participants to reduce the stock overhang have clearly not impressed the market. In truth, the stock overhang is of such gigantic proportions that it will take a lot more than the possible loss of a few million Iraqi barrels and mere words from Madrid to revive oil prices."
CGES said global forward stock cover in fourth quarter 1998 is about 88 days-6 days more than for fourth quarter 1997. For dated Brent crude to recover to $14/bbl, says CGES, stock cover must be reduced to 85 days, and to 80 days for a hike to $18/bbl.
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