Oil Prices Fall Below $60 a Barrel

Oil Prices Fall Below $60 a Barrel on Rising Crude Stocks, OPEC Keeping Output Steady

NEW YORK (AP) -- Oil prices fell below $60 a barrel Wednesday after OPEC's president said the group will keep output intact, and after the U.S. Department of Energy reported a sharp rise in crude stocks last week. Edmund Daukoru, Nigeria's oil minister and president of the Organization of Petroleum Exporting Countries, said output would remain unchanged but that the cartel would monitor it closely between now and its next meeting in Venezuela on June 1.

Meanwhile Wednesday, the U.S. Department of Energy's Energy Information Administration said U.S. crude stocks rose by 6.8 million barrels in the week ending March 3 to 335.1 million barrels -- the highest level since 1999.

"It was an extremely large build in crude stocks -- it was way above any expectations," said Tom Bentz, analyst at BNP Paribas Commodity Futures in New York.

Light, sweet crude for April delivery fell $1.93 to $59.65 a barrel in afternoon trading on the New York Mercantile Exchange. The contract has fallen more than $3 this week since Friday's settlement price of $63.67.

In Wednesday's report, the EIA also said gasoline inventories fell 1.1 million barrels to 224.8 million barrels and distillate fuel inventories -- which include heating oil and diesel -- fell 2.7 million barrels to 131.4 million barrels. Both remain above the upper end of the average range for this time of year, the EIA said.

Gasoline fell more than 2 cents to $1.6125 a gallon in midday trading on Nymex. Heating oil lost nearly 4 cents to $1.6825 a gallon. Natural gas fell 20.8 cents to $6.47 per 1,000 cubic feet.

Gasoline has been especially volatile recently, due to many states banning the gasoline additive MTBE (methyl tertiary-butyl ether), a groundwater pollutant.

The prospect of phasing out MTBE from the Nymex gasoline contract is tough for the average speculator, Flynn said, because "they're caught up in something they have no control over." Traders expect gasoline prices to rise in the coming months as the summer driving season gears up, but "they worry about whether the contract they're trading will be used in the spring and summer," he said.

Still, markets worry about Iran's nuclear ambitions, and Iran made a statement to the International Atomic Energy Agency earlier Wednesday in which it threatened the United States with "harm and pain."

Iran's minister of petroleum, Sayed Kazem Vaziri Hamaneh, insisted that the Islamic republic would not cut back on or halt its oil exports.

Kuwait's oil minister Sheik Ahmed Fahd Al Ahmed Al Sabah -- who believes geopolitical tensions are adding $5 to $8 to each barrel -- said he thinks prices will drop below $60 a barrel by the end of June, but are likely to rebound to the $60 range in the fourth quarter.

Markets were also keeping an eye on the situation in Nigeria, the world's 11th-largest oil producer, where recent attacks have reduced the country's production by 455,000 barrels a day, about 20 percent of its output.

It's unclear if the recent bearish sentiment in energy markets will last, but Bentz said he doubts crude-oil prices will break below $55. "Long-term, we're still in a big uptrend as far as I'm concerned," he said.

Market bears are arguing that inventories are high, demand isn't as strong as they predicted, and OPEC is still pumping at record levels. Market bulls, however, say that because of the United States' warm winter and high prices after Hurricane Katrina, demand has appeared low and its potential to surge has been underestimated, Flynn said.

Also, he added, just because OPEC didn't decide to cut production this week doesn't mean they won't do it later if prices tumble. "Oil ministers are going to have pumper's remorse if they see oil prices go below $60 a barrel," he said.

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The Tanker War, 1984-87 (Price per barrel went from $53 in 1982 to approx. $18 in 1987)

Much of Iraq's export capability was lost during the Iran-Iraq War, either to war-related damage or due to political reasons. In 1982, for instance, Syria (allied with Iran at the time) closed the 500-mile, 650,000-bbl/d-capacity Banias pipeline, which had been a vital Iraqi access route to the Mediterranean Sea and European oil markets. By 1983, Iraq's export capabilities were only 700,000 bbl/d, or less than 30% of operable field production capacity at that time.

Iran's revenue share fell after the 1978/79 Iranian Revolution, followed soon thereafter by the Iran-Iraq War for much of the 1980s [and has not recovered since]. All Iranian onshore crude oil production and output from the Forozan field (which is blended with crude streams from the Abuzar and Doroud fields) is exported from the Kharg Island terminal located in the northern Gulf. The terminal's original capacity of 7 million bbl/d was nearly eliminated by more than 9,000 bombing raids during the Iran-Iraq War.

The tanker war seemed likely to precipitate a major international incident for two reasons. First, some 70 percent of Japanese, 50 percent of West European, and 7 percent of American oil imports came from the Persian Gulf in the early 1980s. Second, the assault on tankers involved neutral shipping as well as ships of the belligerent states.

The tanker war had two phases. The relatively obscure first phase began in 1981, and the well-publicized second phase began in 1984.

The relatively obscure first phase began in 1981, and the well-publicized second phase began in 1984. As early as May 1981, Baghdad had unilaterally declared a war zone and had officially warned all ships heading to or returning from Iranian ports in the northern zone of the Gulf to stay away or, if they entered, to proceed at their own risk. The main targets in this phase were the ports of Bandar-e Khomeini and Bandar-e Mashur; very few ships were hit outside this zone. Despite the proximity of these ports to Iraq, the Iraqi navy did not play an important role in the operations. Instead, Baghdad used Super Frelon helicopters equipped with Exocet missiles or Mirage F-1s and MiG-23s to hit its targets. Naval operations came to a halt, presumably because Iraq and Iran had lost many of their ships, by early 1981; the lull in the fighting lasted for two years.

In March 1984, the tanker war entered its second phase when Iraq initiated sustained naval operations in its self-declared 1,126-kilometer maritime exclusion zone, extending from the mouth of the Shatt al Arab to Iran's port of Bushehr. In 1981 Baghdad had attacked Iranian ports and oil complexes as well as neutral tankers and ships sailing to and from Iran; in 1984 Iraq expanded the so-called tanker war by using French Super-Etendard combat aircraft armed with Exocet missiles.

In March 1984 an Iraqi Super Etendard fired an Exocet missile at a Greek tanker south of Khark Island. Until the March assault, Iran had not intentionally attacked civilian ships in the Gulf.Neutral merchant ships became favorite targets, and the long-range Super-Etendards flew sorties farther south. Seventy-one merchant ships were attacked in 1984 alone, compared with forty-eight in the first three years of the war. Iraq's motives in increasing the tempo included a desire to break the stalemate, presumably by cutting off Iran's oil exports and by thus forcing Tehran to the negotiating table. Repeated Iraqi efforts failed to put Iran's main oil exporting terminal at Khark Island out of commission, however.

The new wave of Iraqi assaults, however, led Iran to reciprocate. In April 1984, Tehran launched its first attack against civilian commercial shipping by shelling an Indian freighter. Iran attacked a Kuwaiti oil tanker near Bahrain on May 13 and then a Saudi tanker in Saudi waters five days later, making it clear that if Iraq continued to interfere with Iran's shipping, no Gulf state would be safe. Most observers considered that Iraqi attacks, however, outnumbered Iranian assaults by three to one. Iran's retaliatory attacks were largely ineffective because a limited number of aircraft equipped with long-range antiship missiles and ships with long-range surface-to-surface missiles were deployed. Moreover, despite repeated Iranian threats to close the Strait of Hormuz, Iran itself depended on the sea-lanes for vital oil exports.

These sustained attacks cut Iranian oil exports in half, reduced shipping in the Gulf by 25 percent, led Lloyd's of London to increase its insurance rates on tankers, and slowed Gulf oil supplies to the rest of the world; moreover, the Saudi decision in 1984 to shoot down an Iranian Phantom jet intruding in Saudi territorial waters played an important role in ending both belligerents' attempts to internationalize the tanker war. Iraq and Iran accepted a 1984 UN-sponsored moratorium on the shelling of civilian targets, and Tehran later proposed an extension of the moratorium to include Gulf shipping, a proposal the Iraqis rejected unless it were to included their own Gulf ports.

Iraq began ignoring the moratorium soon after it went into effect and stepped up its air raids on tankers serving Iran and Iranian oil-exporting facilities in 1986 and 1987, attacking even vessels that belonged to the conservative Arab states of the Persian Gulf. Iran responded by escalating its attacks on shipping serving Arab ports in the Gulf. As Kuwaiti vessels made up a large portion of the targets in these retaliatory raids, the Kuwaiti government sought protection from the international community in the fall of 1986. The Soviet Union responded first, agreeing to charter several Soviet tankers to Kuwait in early 1987. Washington, which has been approached first by Kuwait and which had postponed its decision, eventually followed Moscow's lead. United States involvement was sealed by the May 17, 1987, Iraqi missile attack on the USS Stark, in which thirtyseven crew members were killed. Baghdad apologized and claimed that the attack was a mistake. Ironically, Washington used the Stark incident to blame Iran for escalating the war and sent its own ships to the Gulf to escort eleven Kuwaiti tankers that were "reflagged" with the American flag and had American crews. Iran refrained from attacking the United States naval force directly, but it used various forms of harassment, including mines, hit-and-run attacks by small patrol boats, and periodic stop-and-search operations. On several occasions, Tehran fired its Chinese-made Silkworm missiles on Kuwait from Al Faw Peninsula. When Iranian forces hit the reflagged tanker Sea Isle City in October 1987, Washington retaliated by destroying an oil platform in the Rostam field and by using the United States Navy's Sea, Air, and Land (SEAL) commandos to blow up a second one nearby.

Within a few weeks of the Stark incident, Iraq resumed its raids on tankers but moved its attacks farther south, near the Strait of Hormuz. Washington played a central role in framing UN Security Council Resolution 598 on the Gulf war, passed unanimously on July 20; Western attempts to isolate Iran were frustrated, however, when Tehran rejected the resolution because it did not meet its requirement that Iraq should be punished for initiating the conflict.

In early 1988, the Gulf was a crowded theater of operations. At least ten Western navies and eight regional navies were patrolling the area, the site of weekly incidents in which merchant vessels were crippled. The Arab Ship Repair Yard in Bahrain and its counterpart in Dubayy, United Arab Emirates (UAE), were unable to keep up with the repairs needed by the ships damaged in these attacks.

Source: http://www.globalsecurity.org/military/world/war/iran-iraq.htm

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