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Oil plunges as West secures key Iraqi oilfields

March 22, 2003 13:41 IST

Oil prices deepened a week-long plunge on Friday to hit four-month lows as US and British forces secured key Iraqi oilfields and ports, calming market fears of widespread destruction by Iraqi troops.

The value of oil has dropped by 30 per cent in a week, having peaked at nearly $40 last month. A big wave of extra OPEC oil arriving in the West, replacing supply lost from war-torn Iraq, also helped ease the threat of shortages.

US crude plumbed a four-month low of $26.30, ending the day down $1.21 cents at $26.91. Brent crude oil futures in London fell $1.15 to $24.35 per barrel, having also hit a four-month low.

"The capture of key oil facilities intact is adding to bearish sentiment," said Tony Machacek, a broker at Prudential-Bache International.

British Defence Chief Sir Michael Boyce said all key components of the southern Iraqi oilfields, which normally pump half the country's output, had been secured.

British troops also captured Iraq's Faw peninsula on the Gulf, a strategic oil export route.

"We are trying to make sure that the economic infrastructure of Iraq is left as intact as possible," said Boyce.

Only seven oil wellheads had been torched in the south, less than the 30 previously reported, although oil-filled trenches were also ablaze, he added.

He could not confirm reports that Iraqi President Saddam Hussein may have been killed or injured in the first wave of attacks.

The wellhead fires are a long-term worry for oil markets, but have no immediate impact on supply because Iraq's Gulf exports stopped on Monday and this has already been factored into prices, said Leo Drollas of London's Centre for Global Energy Studies.

"Whether Iraqi oil stays in the ground or is burned above ground, it still doesn't get to the market," he said.

Iraq ranked as the world's seventh largest oil exporter before the war.

Extra output

OPEC exporters, especially Saudi Arabia, have hiked output over the past few months, first to cover a strike in Venezuela and then to cool a price spike fueled by war fears.

Imports of oil in the United States are rising despite the cutoff in Iraqi supplies.

"It is the weight of oil, rather than the force of bombs, which is pushing markets lower," Drollas said. "OPEC is now producing more oil than has been lost."

US Energy Secretary Spencer Abraham said OPEC output was now in line with its total level last November despite shortfalls from Iraq, Venezuela and Nigeria.

Western oil companies operating in Nigeria have slashed production and are expected to close a key export terminal this weekend because of political unrest.

Brokers said investors were selling positions built up on futures markets when U.S. crude rallied to a 12-year peak close to $40 in late February.

"The market has now moved from a war premium to a victory discount," said independent oil analyst Simon Games-Thomas.

OPEC row

Price hawks in OPEC are already concerned about the slump, which is good news for world economic growth, but hits revenue for the cartel of mostly Middle Eastern countries.

The dive has also revealed deep splits in the 11-member Organization of the Petroleum Exporting Countries.

OPEC Secretary-General Alvaro Silva said on Thursday that members have been authorised to use spare output capacity if necessary to make up a shortfall in Iraq supply.

But Iranian Oil Ministry Adviser Hossein Kazempour Ardebili said any output hike would be a "violation" since no decision had been taken to raise OPEC quota limits.

He said extra oil would be a "green light" to the United States to launch an attack on one of OPEC's founding members.

Saudi Arabia, the world's top exporter and a key US ally, is pumping more than a million bpd above its quota of 8 million bpd, according independent estimates.

So far Gulf states near Iraq have reported no disruptions to oil production, nor any disturbances to tanker movements in the Gulf, which is the artery for 40 percent of world oil exports.

An oil refinery depot in southwestern Iran close to the border with Iraq was hit by a rocket on Friday, Iranian government sources said. It was not clear where the rocket, which hit the depot in the city of Abadan, had come from.

Iraq's neighbor, Kuwait, said it cut throughout at its refineries as a precautionary move after a near miss by two Iraqi missiles on Thursday.
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