Market Wobbles in Run-up to Iraq War

With US-Iraqi war clouds on the horizon and crude oil inventories shrinking to a level the International Energy Agency describes as “uncomfortably low”, OPEC meets next Thursday, September 19, in Osaka to discuss raising output for the first time in two years, in order to head off a price increase that could precipitate a world recession.

Oil analysts agree with the IEA, which advises 26 nations on oil policy, that the market needs more crude oil. But they note that over-caution has been the watchword within the Organization of Petroleum Exporting Countries, in which Qatar, Kuwait, Venezuela and Iran have been resisting a production boost.

After all, even a U.S. Navy warning on September 10 to all shipping in the Middle East of a possible al Qaeda attack in the run-up to the first anniversary of 9/11 failed to jolt the oil market. Prices, which have topped $30 a barrel and have rallied by 50 percent this year on speculation of a U.S. attack on Iraq, were described nonetheless by analysts as restrained despite the United States sounding the security alarm. President George W. Bush’s UN General Assembly speech Thursday, September 12, though harsh in tone, caused oil prices to dip – Brent dropped 81 cents down to $27.85 the barrel, while US lost 91 cents and leveled out at $28.85. This was evidently the result of the president’s implication that the assault on Iraq was not momentarily imminent. (See separate article in this issue: Countdown)

But the industrialized world could find itself over a barrel again if the terrorist group or other elements in the Gulf disrupt shipping in the Straits of Hormuz, a six-mile (10-kilometer)-wide corridor vital for the transport of one-fifth of the world’s oil from Iran, United Arab Emirates, Kuwait, Qatar and Saudi Arabia. Many market watchers view the price of oil as reflecting an exceptionally high “war premium” ahead of the Iraq campaign. However, others warn that the “war premium” could soar to $15 when the shooting starts, although it would most likely fall back after it was over. If, however, the Gulf comes to be contaminated with biological or chemical weapons and is un-navigable by tankers, the effect on oil prices and the global economy at large would be incalculable.

As winter approaches, there is concern over the IEA report that shows OPEC production to have fallen by a quarter million barrels per day (bpd) on the back of lower Iraqi output. Petroleum stocks in July dropped to below normal levels for the first time since August 2001.

Analysts predict the downward trend in inventories will continue along with what the IEA forecast would be a steep 1.1 million bpd rise in oil demand this year, noting a recovery in fuel use.

“Producers debate whether or not to increase quotas,” the report said. “The important issue is to recognize that crude stocks are uncomfortably low.”

DEBKA-Net-Weekly‘s oil market experts say the widening deficit is a critical factor behind the past month’s relative strength in crude prices. In the short term, our sources believe that Saudi Arabia, aiming to defend the current OPEC target price band, wants to increase production by one million to 1.5 million bpd, joined by Nigeria and Algeria who also want a higher overall quota, while Iran and Venezuela are expected to speak for the majority calling for quotas to be held to their present levels.

Some analysts believe a compromise production boost of 0.5 to 0.75 million bpd is in the cards, but DEBKA-Net-Weekly‘s sources are laying odds on the higher Saudi figure rather than on a compromise. The real debate, they say, will be over whether to implement a quota hike, not on its size.

Russia has emerged as a major exporter, eager to expand its American market and further reducing the leverage of OPEC nations, who already wield much less power than they did in the first Gulf War of 1991. Therefore, the news that Gazprom, the leading Russian producer and distributor of natural gas, recently signed several strategic partnerships with Russian oil companies Rosneft, LukOil and Surgutneftegaz, is highly relevant.

DEBKA-Net-Weekly‘s energy experts see the deal as a step forward toward developing the vast Yamal fields in Siberia’s Yamal peninsula that hold 10.3 trillion cubic meters of natural gas. Gazprom plans to maintain production at around 530 billion cubic meters in 2003 and onwards, a figure the experts believe will be unattainable without a contribution from the Yamal fields. The cost of developing the Yamal peninsula over the next 30 years is estimated at between $40 billion to $70 billion.

Furthermore, investors are showing an interest in the Murmansk crude shipping terminal project that would expand Russia’s transport infrastructure.

Oil was also a leading topic in the talks taking place in Moscow this week between US Undersecretary of State John Bolton and Russian officials. A frequent visitor to Vladimir Putin’s Kremlin, Bolton was assigned to negotiate cooperation accords, under which the Russians will help make up any shortfall in energy supplies arising from the war against Iraq, as well as playing ball on pricing strategy. Bolton and his hosts also no doubt addressed Russia’s post-war stake in Iraqi oilfields, the world’s second largest.