As Iraqi President Saddam Hussein ignores international opinion in order to regain his grip on northern Iraq, oil producers are enjoying a period of unexpectedly high crude prices.
Brent crude oil for October delivery closed at $23.58/bbl Sept. 11, up $1.47 on the week. October crude futures on the New York Mercantile Exchange closed the same day at $24.75, up $1.31 on the week.
Since Saddam first moved troops into Kurdish-held areas of northern Iraq early this month and U.S. forces retaliated with a barrage of cruise missiles at targets near Baghdad, Brent crude oil futures have hovered near the $22/bbl mark (OGJ, Sept. 9, p. 34).
The U.N. plan for sale of Iraqi oil to fund purchase of humanitarian supplies is off, and there is an increasing realization that the deal was a sham for at least one side (see Watching the World, p. 25).
Yet there is a feeling that the U.N./Iraq oil-for-food plan will be brought back to the U.N. discussion table once upcoming U.S. elections are over, despite Saddam's actions.
Oil prices firming
Lindsay Horne, executive director of the energy derivatives group at Lehman Bros. Ltd., London, told Oil & Gas Journal that while nobody knows what will happen next in Iraq, oil prices are well supported and getting stronger.
"The whole issue has been even more politicized because of the U.S. presidential elections in November," said Horne. "As far as oil prices go, it's very difficult to see the market coming lower in the next 4-6 weeks. If anything, oil prices could go higher."
Horne said some traders say market fundamentals don't justify the high prices, but refiners' stocks are still low and anticipated new production from outside the Organization of Petroleum Exporting Countries has been delayed.
"A huge number of oil consumers, such as utilities and shipping companies, had been looking to hedge against higher prices anyway," said Horne, "but they missed the boat by miles.
"Now their question is: to avoid a complete roasting, should they do something now and protect against further rises? Whatever happens, it will end in tears for them anyway."
Horne said many traders and oil purchasers had guessed wrong on prices several times since June, after the signing of the U.N./Iraqi agreement.
"The horse has well and truly bolted for now," said Horne, "but Iraqi oil will come back on the agenda. The whole issue will return to haunt us eventually."
CGES view
Leo Drollas, chief economist at London's Centre for Global Energy Studies (CGES), told OGJ that Saddam has once again proved he can take advantage in the face of vacillation among U.N. members.
Drollas believes Saddam's regime is being propped up by oil export revenues, allegedly through smuggling over the border in Turkey and through tankers via Iran.
Since June, when the market was weak and the U.N./Iraq agreement was fresh, market fundamentals have changed, and the outlook is for strong prices, Drollas says.
Recent figures from the International Energy Agency, Paris, show strategic stock levels at 60 days' worth of oil and products, but CGES reckons current stocks would last only 59 days.
"We are going into winter with 1 day's stock less than we had in the third quarter," said Drollas, "and with 3-4 days less than at this time last winter. Companies haven't managed to rebuild stocks through summer."
CGES predicts that, unless a flood of non-OPEC production comes on stream in the short term, and as long as Saudi Arabia, Kuwait, and the U.A.E. keep their production levels steady, high prices will continue.
Drollas said the average price of OPEC's basket of crudes averaged about $19.60/bbl in the third quarter and under current conditions is expected to average $20.60/bbl in the fourth quarter.
As an illustration of changing market fundamentals, in June CGES was predicting fourth quarter OPEC basket crudes would average more than $5/bbl less than the current forecast (OGJ, July 1, p. 34).
Though Drollas believes the limited sales of Iraqi oil will not take place under the current regime in Baghdad, he predicts that while the subject will be off the agenda for a long while, some U.N. members will insist the topic be reintroduced.
"France and Russia will bring up the issue of humanitarian aid soon," said Drollas. "They'll say what Saddam did was an internal matter, while the U.S. will bring up the usual objections. The debate will come back again, but there is likely to be nothing significant before the new year."
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