Oil Prices Plunge on Calmer Talk by Bush, Iraqi Chief

Conciliatory words from President Bush and Iraqi President Saddam Hussein eased oil traders’ fears Monday of Middle East war and drove crude oil prices down strongly from last week’s record highs in the sharpest plunge since they began to climb steeply a month ago.

“It was kind of like the air in a balloon,” oil analyst Scott T. Jones said. “It’s hard to puncture it and keep the air from coming out in a big rush.”

But traders were of different minds about whether the rapid falloff marked an end to the upward spiral of oil prices or whether it was only the latest correction in a market that remains jittery about war and could take off again at any moment.

“It won’t be a nice, steady retreat,” said Jones, a former Atlantic Richfield Co. executive who is now president of AUS Consultants in Philadelphia. “Expect to see more ups and downs.”

After trading above $40 last Thursday for the first time ever, crude oil for November delivery fell $2.42 Monday to settle at $37.09 a barrel in light trading on the New York Mercantile Exchange. It was the biggest one-day fall since prices dropped $4 a barrel on Aug. 27.

Crude oil for delivery in later months also fell back Monday, but those declines were limited by exchange rules to $1 a barrel.

Prices for refined products followed suit. Unleaded gasoline for November delivery fell 4.8 cents a gallon to close at 93.91 cents; home heating oil fell 5.89 cents a gallon to settle at $1.003. Refined products for delivery in later months also fell, but some drops were limited by exchange rules to 3 cents a gallon.

Prices had risen rapidly in the last week on increasing fears that war would break out at any time, strangling world oil supplies and causing oil prices to gush out of sight.

Those fears were not calmed even when Bush said last Wednesday that he would release 5 million barrels of oil from the nation’s Strategic Petroleum Reserve or when the House approved boosting that test drawdown to 15 million barrels.

But on Monday, traders apparently felt it was time to take profits, and oil fell about $1 at the opening. They were responding to a speech by Hussein on Sunday--the birthday of the Prophet Mohammed--in which he reacted positively to a peace proposal by French President Francois Mitterrand. On Monday, Hussein also ordered the release of nine French hostages.

Oil prices fell again by $1 or so after Bush’s late-morning speech to the U.N. General Assembly, a speech that was construed as “a conciliatory statement that something might be coming together soon” to resolve the 2-month-old Mideast standoff, said Tom Bentz, director of trading at United Energy Inc. in New York.

In his speech, Bush denounced Hussein as a “dictator” and an international pariah but said the United States remained committed to a “diplomatic outcome” of the crisis.

He also hinted that after an “unconditional” Iraqi pullout from Kuwait, “opportunities” might exist to resolve other regional disputes, including the Arab-Israeli conflict--seemingly the first time an Iraqi retreat has been linked to the question of Israel’s occupation of Arab lands.

Both Bush’s and Hussein’s statements--as well as lackluster economic news last week suggesting that demand for petroleum products could fall off as winter nears--were enough to bring oil prices down from their historic highs, traders and analysts said.

At one point Monday, oil traded as low as $35.85 a barrel, $3.66 below Friday’s closing price.

“Oil has not been priced according to supply and demand fundamentals but has been overpriced on war speculation, and with world leaders talking less about war and more about a possible negotiated solution, that’s stripping all the war premium out of the price,” said Sal Gilbertie, a trader at Merrill Lynch Futures in New York.

When that happens, traders become a little more aware of the fundamentals--such as the fact that crude supplies remain adequate and that demand for oil products may fall, especially if Congress enacts a 10-cent-a-gallon gasoline tax hike as part of its budget agreement with Bush.

Crude Prices

Daily close, November contract, West Texas intermediate crude, price per barrel:

Monday: $37.09, down $2.42