OPEC reacted to the beginning of hostilities by announcing on 20 March a suspension of quotas, causing an immediate fall in prices. Brent dropped to $26.67, having already lost 7 per cent of its value after US President Bush delivered his ultimatum to Saddam Hussein on 17 March. ‘Traders are betting on a short war with minimal disruption, and are selling before a projected slump,’ says a London-based analyst.

For oil markets, the war scenario effectively began on 17 March, when UN personnel administering the oil-for-food programme were evacuated from Iraq and tankers stopped loading at Iraq’s two official export terminals. Banks refused to provide financial guarantees to traders, fearing insufficient time to load and return before the bombs began dropping.

OPEC assures the market that it can maintain supply with statements to that effect coming from Saudi Arabia, Qatar and Algeria in recent days, and from the OPEC president on 20 March. Saudi Arabia, to whom it will largely fall to make good the Iraqi shortfall, has chartered new tankers capable of transporting 1 million barrels a day (b/d) to the market in April. Riyadh also announced that about 50 million barrels of crude is already in storage ready for export.

As the Iraq drama plays out, other factors are coalescing to ease supply fears. Venezuela has succeeded in restoring production more swiftly than expected, raising output to about 2.4 million b/d. The northern hemisphere winter is also coming to an end, reducing demand for heating oil. Seasonal demand is expected to drop by about 2 million b/d in the second quarter. Meanwhile, Saudi oil shipped to the US in January to meet demand created by the cold snap and the Venezuelan outage will arrive at the beginning of April. Most analysts therefore see a significant fall in prices on the horizon.

However, the fall is unlikely to be as sharp as in 1991. ‘Oil prices will be supported by high levels of demand from China and Japan, which is in the process of switching away from nuclear fuel, and by unusually low inventories,’ the analyst said.

The next looming supply worry comes from Nigeria. Unrest has forced the Royal Dutch/Shell Groupto close two flow stations and evacuate staff from the Niger Delta, and a total of 90,000 b/d of output has been shut off. Further disruption is forecast around April’s general election.