- The Washington Times - Thursday, August 26, 2004


Oil prices fell for a fifth consecutive day yesterday despite a sharp drop in Iraqi exports after pipelines were sabotaged — evidence that the bull market may have lost some steam.

The price of oil has plunged 11 percent in the past week, retracing nearly all the gains it had made since the start of the month.

“It looks like people are in sell mode,” said Mario Sanchez, an oil futures broker at ABN Amro in New York.

Light crude for October delivery dipped 37 cents to $43.10 a barrel on the New York Mercantile Exchange. In London, Brent crude futures dropped 35 cents to $40.33 a barrel on the International Petroleum Exchange.

A top oil official told the Associated Press that a sabotage attack on a cluster of 20 oil pipelines in southern Iraq has cut daily exports from the key oil-producing region by half, down to 900,000 barrels.

The news out of Iraq was the kind of information that traders and market analysts have cited in recent weeks to explain the rapid run-up in oil prices.

But yesterday, the trend was bucked, with prices falling as low as $42.50 in intraday trading.

“When I got into the office this morning I saw there was bullish news out there and thought ‘Why is this happening?’” Mr. Sanchez said.

The answer, according to Mr. Sanchez and others, is that oil markets are in the midst of a “technical correction” — in other words, traders and speculators believe prices raced ahead too fast late last week, when crude futures made what seemed at the time to be an unstoppable charge toward $50 a barrel.

But that level was never reached. Instead, crude futures settled a week ago yesterday at $48.70 — the highest Nymex settlement price — and have fallen steadily ever since.

When adjusted for inflation, yesterday’s settlement price for crude is roughly $14 cheaper than it was leading up to the first Persian Gulf war.

On Wednesday, oil prices plunged nearly 4 percent. That drop also revealed the strength of the recent sell-off in that it followed a government report that showed a larger-than-expected decline in the amount of crude commercially available in the United States.

Alaron Trading Corp. oil analyst Phil Flynn said the “fever” that was in the market last week has definitely disappeared.

“No doubt, some of the steam has been taken out,” Mr. Flynn said. “But it could be short-lived.”

Indeed, many analysts believe prices will remain higher and more volatile than usual until there is a significant rise in global output or slump in demand.

Worldwide average daily consumption is above 82 million barrels, while there is only about 1.5 million barrels of surplus output capacity, leaving scant slack in the market.

As a result, traders have fretted all summer that there would be an inadequate supply in the event of prolonged output disruptions in Iraq, Saudi Arabia, Russia or Venezuela.

But with the exception of sporadic reductions in Iraqi oil exports because of attacks on industry infrastructure, none of these fears have materialized.

Oil-price speculation by institutional investors, including hedge funds, magnified this summer’s surge in prices, as well as the latest retreat in prices, analysts said.

Other reasons prices may have dropped again yesterday despite the decline in Iraqi exports:

• The official at Iraq’s state-run South Oil Co., who spoke on the condition of anonymity, said the damage could be repaired in as few as three days.

• Rebel cleric Muqtada al-Sadr, whose loyalists are suspected of being behind the sabotage of oil infrastructure, agreed yesterday to a peace deal presented by top Shi’ite cleric Grand Ayatollah Ali al-Sistani to end three weeks of fighting in the holy city of Najaf, a top al-Sistani aide said.

Yesterday, OPEC’s president said the cartel will discuss raising output at its meeting next month and that he would like to see oil prices fall “to around $30 per barrel.”

Analysts said yesterday that the Organization of Petroleum Exporting Countries’ $30 a barrel target was probably unrealistic, given the strength of global demand and lack of much excess supply.

They said crude prices could rise again toward $50 before the year is up — especially if it turns out to be a cold winter, which would drive up home-heating demand.

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