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EDITIONS
Tuesday, 17 September, 2002, 20:16 GMT 21:16 UK
Oil price plummets on Baghdad offer
A North Sea oil platform
Oil prices have risen 40% so far this year
News of Iraq's agreement to re-admit weapons inspectors for the first time since December 1998 has triggered a slump in the price of oil.

Prices fell by as much as 5% in early trading but recovered after the US reacted with scepticism to the offer and said it would still look for a U.N resolution to force Iraq to disarm.

By the US close, the price of a barrel of Brent light crude - one of the benchmarks for the oil business - was down 55 cents to $27.97.

The change takes the pressure off the oil cartel Opec, which is meeting to discuss quotas in Osaka later this week.

The Opec basket price, which is $3 or so cheaper than US crude, is now well within Opec's preferred $22-28 range.

Off the boil

The fear that war with Iraq was imminent, after US sabre-rattling to the UN General Assembly made clear the White House's determination to get rid of Iraqi leader Saddam Hussein, pushed oil to 19-month highs of more than $30 a barrel.

Analysts now say that the "war premium" which this year's 40% hike in prices represents could now gradually evaporate - but only if the offer proves more than the delaying tactic the US believes it to be.

In any case, as one European official put it, "The question now is whether the Americans will take 'yes' for an answer."

US treasury secretary Paul O'Neill has already said he was sceptical of the Iraqi offer.

"Saddam Hussein has got to go, there's got to be a regime change", said Mr O'Neill.

The news from Baghdad had effects beyond the oil market too.

Stock markets across Asia responded positively, with airline shares - hard hit by fuel costs - particularly in demand.

Output boost?

Before Baghdad's decision to back down from its blanket refusal, Opec was under severe pressure to raise quotas in the hope of bringing prices back down.

Signals from Opec itself were contradictory, with its secretary-general, Alvaro Silva, commenting that enough oil is being supplied to the market.

Recent price surges, he said, were solely caused by concerns about a war with the Opec member Iraq rather than by real shortages.

The oil minister of the United Arab Emirates, Obaid bin Saif al-Nasseri, said on Tuesday that there was now no need to change the supply quotas.

"There is no justification for increasing production at the time being because prices are still within the range," he said.

Up or down

However, market-watchers warned that Iraq's offer was far from being the end of the story.

"No change in Opec output will cushion the size of the fall in oil prices if Iraq does comply with the UN," said David Thurtell, commodities strategist at Commonwealth Bank in Sydney.

But there remained the strong possibility that the offer will either be rejected by the US and UK, or that Iraq will simply stall, he said.

And others note that some Opec members are dead against any loosening of the daily 21.7 million barrel quota.

Widespread quota-busting - mostly from cash-strapped states such as Nigeria and Algeria - amounts to as much as 2 million barrels a day, and Venezuela, Indonesia, Kuwait and Qatar want the limits kept in place.

With the northern hemisphere winter on the way - and demand therefore set to climb - the strains on the market are set to increase whatever Iraq and the US decide to do, said Sarah Emerson, of energy consultants Energy Security Analysis Inc in Boston.

"If Opec is not going to raise quotas, they're abrogating responsibility for the price," she said.

Analysis of the oil market, OPEC, and the alternatives

Key stories:

Analysis

Background
See also:

17 Sep 02 | Business
16 Sep 02 | Business
16 Sep 02 | Business
08 Sep 02 | Business
08 Sep 02 | Business
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