Oil Market Facing Risk of Price-Spike

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Posted by Esperanza from 66-52-14-42.lsan.dial.netzero.com ( on Saturday, February 08, 2003 at 2:34PM :

Oil market facing risk of price-spike as war looms


LONDON: The oil market, unlike other financial markets, has yet to fully price in the risk of a war with Iraq, leaving oil prices vulnerable to a sharp spike if conflict becomes imminent, analysts said on Wednesday.
Although oil has been trading close to its highest levels in two years recently, this reflects tight global inventories of the commodity due to a significant degree to supply disruptions from Venezuela.

Merrill Lynch Energy Research Director Michael Rothman said the oil market had become somewhat blase about the looming threat of war in Iraq.

"Is there a war premium in crude? The answer is really no," Rothman said, adding traders "are waiting until there's concrete evidence that war is imminent" before they fully price in the risk.

In contrast, other markets appear to have sharply discounted geopolitical risks.

The Swiss franc, a traditional safe-haven for investors in the event of global tensions, has soared to four-year highs, while gold - another historic investment for the risk averse - has hit seven-year highs.

The US dollar, in particular, has suffered under the weight of geopolitical risks, according to currency strategists, plunging more than 20 per cent against the euro during the past year. The drop has accelerated over the past two months as tensions have risen over Iraq.

Analysts said oil prices were currently high mostly due to low inventories, however. US inventories by some measures have recently hit their lowest levels in around a quarter of a century.

Global oil inventories are now "as low as they were at the end of the summer of 2000," when oil prices were US$36 to US$37 a barrel, Rothman said.

On Wednesday, benchmark Brent crude for March delivery was trading up 46 US cents on the day at US$31.55 as US Secretary of State Colin Powell began a presentation to the United Nations (UN) Security Council laying out the US case that Iraq has failed to disarm.

Kevin Norrish, head of commodities research at Barclays Capital, said current high oil prices reflected tight inventories rather than a war premium.

"Given the very low level of (global oil) inventory, you'll find where we are now is where we should be," he said, referring to the historical correlations between inventory levels and crude prices.

Market participants widely expect prices to jump higher if it becomes clear that war has become a certainty.

Iraqi production - currently at an estimated 2.4 million barrels per day allowed under a UN-supervised oil-for-food programme - would be sure to be cut off from the global market in the event of a war.

Meanwhile, as Saudi Arabia and others have pledged to maintain global supply, the risks of wider disruption to supply and distribution are difficult to calculate in a war, analysts said.

"If there is a severe supply disruption, prices will go higher," Norrish said.

-- Esperanza
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