Prices leap on stocks fall

16 August 2002

Crude oil prices reached three-month highs in mid August, driven by a sharp fall in US energy stocks and continued fears of a US military campaign against Iraq. A further fall in Iraqi export volumes in early August contributed to the bullish market sentiment, while ongoing talks between Moscow and Riyadh averted longer-term fears of an oil price war.

Crude stocks dropped by 9.5 million barrels in the week ending 9 August according to a 13 August report by the American Petroleum Institute (API). The decline leaves crude stocks at their lowest level since January 2001, although the government's strategic emergency reserves have substantially increased during that period. API also said that gasoline reserves had fallen by 3.9 million barrels in the week, indicating that demand in the US is starting to improve again, despite being 1.4 per cent down year on year.

While the poor demand figures for most of the year have put downward pressure on the oil price, political pressures, not least the threat of US military action against Iraq, have bolstered it. The ongoing wrangle over weapons inspection became even more fraught in mid August, with Baghdad preparing to comment on the reintroduction of UN weapons inspectors. Expectations of some kind of US action rose slightly with confirmation by the US navy that it was reinforcing its Red Sea presence.

Any action would almost certainly result in serious disruptions to Iraq's oil supplies. Exports are already falling, however, as traders avoid a crude that is seen as increasingly unreliable. Aside from the military dangers, there are difficulties in valuing Iraqi crude, which is priced retroactively to prevent illegal kickbacks. As a result, exports fell to 629,000 barrels a day in August, less than half the January level.

Iraq is not the only threat to oil market stability. Relations between Russia and OPEC have been threatening to develop into a fully fledged price war. While the chances of a war developing are remote, OPEC members are working hard to convince Moscow of the need to restrain production during periods of low demand. Saudi officials in mid August followed OPEC secretary-general Alvaro Silva to Moscow to discuss co-operation.

In a separate development, two of the largest Russian producers, Yukos and Lukoil, announced their interest in developing a new export terminal at Murmansk for supplies to the US. US President George Bush met Russian President Vladimir Putin in July and the two discussed energy security.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications