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World: Oil Prices Swing Wildly With War Reports

Oil prices are swinging wildly on reports about the war in Iraq, but analysts say that world-market fundamentals remain unchanged. As the United States emerges from the winter heating season, producing countries like Iran remain wary of pumping too much, while the U.S. Department of Energy sees no cause to tap the Strategic Petroleum Reserve.

Boston, 26 March 2003 (RFE/RL) -- Experts say big swings in oil prices may mean little from one day to the next during the Iraq war. Last week, prices plunged on the expectations of a short war, only to rebound this week as perceptions grew more wary. But analysts are dismissing both moves as trading turbulence that will have little effect on the world economy over time.

Ira Joseph, director of the international energy group at PIRA Energy in New York, told RFE/RL, "Anything that happens inside of a week isn't going to affect the fundamentals."

Much like the stock market, oil trading is driven by daily news that may be quickly overtaken by events. But economic expectations in both oil-producing and -consuming countries are often swept up in conclusions that soon prove to be wrong.

While consumers fear a wartime price spike, producers like Russia and Iran are worried that high oil output could devastate prices as soon as the war ends, leaving their economies with no means of support. Between the extremes, daily trading is driving the cost up and down on assumptions that may have little grounding in fact but still cause concerns.

In the first days of the conflict last week, world oil prices dropped suddenly by more than 25 percent to well below $30 per barrel for the first time since January as the market welcomed the end of the long wait for war.

Early this week, prices rebounded by more than $2 per barrel on speculation that the war could drag on. Ethnic clashes in Nigeria, leading to the loss of some 40 percent of the country's production, added to the higher price push. But yesterday, prices stalled again following British television reports of an uprising in Basra against Iraqi President Saddam Hussein, the Reuters news agency said.

Joseph said the fundamental forces behind oil prices remain the same as they did before any of the price swings. "People are just playing around with the bubble -- the war premium," Joseph said.

Joseph said the market has added a premium of about $5 per barrel to oil prices because of the war-related risks. That factor is now serving as an open field for price jumps that may be driven by daily news, rumors, or speculation, temporarily masking the fundamentals of supply and demand.

Joseph sees very low U.S. oil inventories at the end of a cold winter providing basic support for higher prices. At the same time, the second quarter is usually a time of weaker demand because the heating season is ending and warm-weather travel has yet to begin, said Robert Ebel, director of the energy and national-security program at the Center for Strategic and International Studies in Washington.

Ebel was asked whether anything has really changed in the oil market since the war started. He said, "Probably not, when you're just talking about the fundamentals."

While the trouble in Nigeria is causing traders to worry, the loss to the world market has been offset by the partial return of Venezuela's production from its civil unrest. The disappearance of Iraqi oil from the market due to the war and the end of the United Nations oil-for-food program was anticipated. Higher output from Saudi Arabia has made up the difference.

The biggest moderating factors on oil prices in the midst of the war are still Saudi Arabia's pledge to pump more as needed and the ultimate backstop of the U.S. Strategic Petroleum Reserve, which could release nearly 600 million barrels of oil. This week, the U.S. Energy Department repeated that it sees no need for such a move at this time.

Ebel said, "I think that we have an understanding with Saudi Arabia that we won't tap into the Strategic Petroleum Reserve as long as they keep expanding production." So far, the balance seems to be keeping the volatile markets within bounds, despite the war risks.

The wartime speculation has still made the oil market treacherous. Ebel said, "Forecasts are usually tenuous at best, and now, you know you're going to be wrong."