U.S. and Iraqi governments have again teetered on the brink of war, the United Nations food-for-oil deal with Iraq is in tatters, and nervous traders have hitched crude oil prices up a notch in view of market uncertainty.
U.N. Sec.-Gen. Boutros Boutros-Ghali Sept. 1 set the stage for the swiftly deteriorating situation in the Middle East by putting off plans to implement the oil-for-food deal that would have allowed Baghdad to reenter world oil markets for the first time in 6 years.
A U.N. official said the secretary general had decided to hold off the arrangement because of fears about the security of the U.N. staffers needed in Iraq to implement the program.
President Bill Clinton on Sept. 3 responded to attacks by Iraqi troops against Kurdish forces in northern Iraq by ordering U.S. forces to launch 27 cruise missiles at targets in southern Iraq. A day later U.S. forces launched another 17 missiles against Iraqi positions in the southern part of the country.
Iraq's President Saddam Hussein sent troops into a "safe haven" for anti-government Kurds, apparently following a request to Baghdad by the leader of a rival Kurdish faction.
President Clinton responded with one of the largest missile strikes against Iraq since the Persian Gulf war of 1990-91 and extended a "no-fly zone" in southern Iraq to deny Iraq control of air space from the Kuwait border to Baghdad.
Clinton also declared that the U.N.-Iraq deal, under which $2 billion worth of Iraqi oil would be sold on world markets to pay for badly needed food and humanitarian supplies in Iraq, would be suspended.
The U.N.-Iraq deal had taken months to hammer out, and while many U.N. members were keen to see the deal through to improve the lot of Iraqi civilians, neither Washington nor Baghdad would particularly benefit from the deal.
From Washington's viewpoint, the U.N.-Iraq deal would only extend the life of Saddam's brutal regime, while from the view of powerful groups in Baghdad, U.N. interference would only foul up current lucrative arrangements (OGJ, July 22, p. 21).
How it started
A buying frenzy on oil markets began with escalating tensions in the wake of Iraqi troop movements into Kurdish-held opposition territory and news that U.S. President Bill Clinton was preparing a response.
Over the weekend, Clinton had placed U.S. gulf-based troops on high alert, and Boutros-Ghali had put off plans to implement plans to sell as much as $2 billion worth of oil in 6 months, working out to an Iraqi export level of about 700,000 b/d.
Oil market momentum was maintained Tuesday by reports that U.S. Air Force B-52 bombers had taken off from Guam carrying cruise missiles.
Oil traders said the market was being hit both by news of the escalating tensions and the fact that Iraqi crude sales-which they had expected to start in September-were on hold.
"It's a short term thing. The market will be volatile," one trader said. "The fact that it came after a long weekend did not help. But if the oil sales are put back on track then prices will come off."
But traders said the tensions came at a sensitive time for the U.S.
Stocks of refined products, notably heating oil and gasoline, are at very low levels. In addition, Clinton was heading into a presidential election in November.
Oil prices spike
As news of the Sept. 3 missile strike spread, London trading in Brent crude oil for October delivery was frantic, with the price rising $1.21/bbl on the day to close at $21.95/bbl. But October Brent crude prices peaked that day at $22.85/bbl during hectic activity on the London trading floor of the International Petroleum Exchange (IPE), as New York markets opened after Labor Day.
In Singapore, October Brent crude reached $23.50/bbl on the Singapore Exchange before IPE opened Sept. 3. But as the shock of the news wore off, the price began trickling downwards.
In New York, news of the U.S. military strikes against Iraq lifted oil prices to 4-month highs.
Crude oil prices Sept. 3 traded as high as $24.25/bbl on the New York Mercantile Exchange (Nymex) before closing up $1.15 on the day at $23.40/bbl.
During Asian trading hours, the Nymex next-month crude oil contract, traded on the after-hours Access system, reached its highest level since Apr. 22, up more than $1/bbl from Friday's close in New York.
U.S. financial markets were closed for the Labor Day holiday.
Some traders said the momentum, if maintained, could sustain Nymex crude for October delivery to more than $24/bbl.
Market uncertainty
An IPE official told Oil & Gas Journal traders are now uncertain about what Clinton and Saddam will do, and they are not putting a limit on how high the oil price could rise.
Brent futures reached $46/bbl in 1990 with the onset of the Persian Gulf crisis sparked by Iraq's invasion of Kuwait, said the official, and that could be the highest point it will reach again in the near term.
Yet much of the shine was said to have been taken off the price as New York traders saw the price was inflated and decided to take profits, driving the price down again.
Products shortages are still a major force behind markets, said the IPE official, and gas oil prices have reached their highest levels since the gulf war, closing at $210/metric ton Sept. 2.
"We can expect $2 swings in the crude price in the short term," said the IPE official. "This is good from the trading angle, but from the hedging angle it could be a nightmare. Companies need to get some hedges on."
Geoff Pyne, oil market analyst at UBS Ltd., London, took a more downbeat view of oil price prospects, saying that since the emotional reaction to the bombing had faded, oil prices have been edging down.
Pyne said October Brent crude trading opened at $22.07/bbl in London Sept. 4, and varied at $21.90-22.11/bbl in morning trading that day.
"We don't think the U.N./Iraq deal will happen this year now," said Pyne, "and we expect crude prices will soften towards yearend. By then we expect West Texas intermediate to be trading at $19-20/bbl.
"An extra 600,000 b/d of oil from Iraq would have made a lot of difference to prices, but now it appears there will still be a small surplus of supply towards yearend, of about 200,000-400,000 b/d."
Pyne said the distillates market is remarkably high at the moment, and it is currently easy for one product to sway the entire market.
Another factor affecting short term price outlooks is that traders are also worried about other Middle East problems besides Iraq. One such prospect is any possible action by Clinton in response to the recent purported bombing of a TWA passenger jet off Long Island, N.Y.-assuming that was a terrorist act involving what U.S. officials consider to be pariah states that also happen to be major oil exporters.
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