Oil Prices Drop as Skepticism About Cease-Fire Grows

Oil futures prices retreated Tuesday as traders grew skeptical that a possible cease-fire in the war between Iran and Iraq would soon reduce the world oversupply of oil. Reports said Iraqi warplanes raided an unfinished nuclear plant and other Iranian industrial targets, and Iranian warplanes retaliated by raiding a dam in Iraq.

The August contract for West Texas Intermediate, the benchmark U.S. crude oil, fell sharply, losing 47 cents a barrel to settle at $15.23 a barrel on the New York Mercantile Exchange.

Traders said the contract for August delivery, which expires today, was depressed partly by plentiful inventories of oil at U.S. terminals. The September contract, which is less sensitive to short-term inventories, fell 26 cents a barrel to settle at $15.63 a barrel.

Prices continued to fall after the close following a report by the American Petroleum Institute of an unexpected build-up in gasoline stocks and a modest decline in crude oil inventories.

“The market took a more realistic view today,” said Andrew Lebow, an analyst at E. D. & F. Man International Futures Inc. in New York. “Based on real fundamentals, there still is a short-term or maybe even intermediate-term oversupply of crude.”

On Monday, the August contract for West Texas Intermediate had jumped 84 cents a barrel after Iran said it would accept a United Nations resolution calling for an immediate cease-fire in its nearly 8-year-old war with Iraq.

The news raised the possibility that members of the Organization of Petroleum Exporting Countries would be able to set aside their differences and agree to production cutbacks that would prop up prices.

But Lebow said, “There’s a lot of work to be done to get from the end of the war to OPEC production cutbacks.”

Cooperation Unlikely

“I think that yesterday’s rally was totally overdone,” said William Byers, an analyst at Bear, Stearns & Co.

Another factor hurting prices was an unconfirmed report that Saudi Arabia was selling oil from Caribbean inventories to non-contractual customers at prices near the spot price, Lebow said.

Even if a cease-fire between the foes is established, it is unlikely that Iran and Iraq will cooperate on oil production, analysts said.

“The Organization of Petroleum Exporting Countries will have as many, if not more problems, if a cease-fire or actual peace between Iran and Iraq is reached,” said Vahan Zanoyan, senior director of the Petroleum Finance Co. “You’re left with two countries with greater export capacities . . . and more revenue needs.”

David Mizrahi, editor of the Mideast Report, said, “Iran and Iraq won’t raise money by selling pistachios or figs. They may even ask other OPEC members to reduce their quotas so they can have a larger share of the total.”

Mizrahi said Iran is capable of producing 6.3 million barrels per day, well above its 2.369 million barrel-per-day quota, and Iraq also has the potential to produce more oil than its current estimated daily output of 2.6 million barrels.

Overproduction Continues

“The bottom line is that there would be enough oil for us to swim in,” Mizrahi said.

The spot price of North Sea Brent, the most widely traded crude, dipped 30 cents to $14.95 a barrel.

The contract for August delivery of No. 2 heating oil fell 0.37 cent to 42.90 cents a gallon on the New York Merc. The contract for August delivery of unleaded gasoline fell 0.46 cent to 50.65 cents a gallon.