Rumors of Peace Send Oil Prices Into Tailspin : Energy: Analysts cite comments by an Iraqi official for a $3-per-barrel plunge.
Rumors of peace shocked the oil markets Friday, as prices plunged $3 a barrel amid reports that Iraq sought a diplomatic solution to the Persian Gulf crisis.
Oil prices “dropped like a stone,” observed Norman E. Mains, chief economist at the Bateman Eichler, Hill Richards investment firm in Los Angeles.
The fall was good news to investors, who have had plenty of bad news about oil in recent weeks. The Dow Jones industrial index jumped 68.07 points to close at 2,520.79, following a gain Thursday of 64.85. Bonds also rallied, capping a week in which crude oil fell $5.90 a barrel on the New York Mercantile Exchange.
“It’s conceivable that reality is creeping back into the people that are buying and selling oil,” said Kenneth W. Haley, manager of energy forecasting for Chevron Corp. in San Francisco. “But, as sure as I say that, maybe prices will go up tomorrow.”
The falloff in energy prices Friday was propelled by comments from Iraqi First Deputy Prime Minister Taha Yassin Ramadan in Amman, Jordan. “There is serious thinking to find a peaceful outlet to the crisis, be it on the Arab or European arenas,” the official reportedly said.
As word spread through computerized news services and into trading rooms, speculators began unloading oil contracts. The selloff began in Asia and then shifted to Europe and the United States.
On the New York Mercantile Exchange, West Texas Intermediate crude--a widely quoted barometer of oil prices--closed at $33.79 a barrel, $3.01 below Thursday’s close. That is the price for futures contracts--oil promised for November delivery. Since Oct. 11, crude has fallen $6.63 a barrel from its record peak closing price of $40.42.
Although economists teach that prices have a rational basis in supply and demand, the explosive leaps and declines in oil since August are also explained in terms of fear and emotion, analysts say.
“When Saddam Hussein says something aggressive, they go up. When he says something less aggressive, they drop,” Mains said.
Crude oil was not the only energy-related product to drop Friday. The wholesale price of heating oil for November delivery also fell sharply, declining 8.11 cents to 88.4 cents a gallon.
The lack of a serious oil shortage was underscored earlier this week, when the U.S. Department of Energy announced that other countries were largely making up the loss of oil from Iraq and Kuwait. The loss--4.3 million barrels of daily output--will largely be offset by the end of the year with extra oil produced in Saudi Arabia, Nigeria, Libya, Iran, Venezuela and other countries, according to U.S. energy officials.
“Today, there is enough crude oil to keep the world in balance--so long as nothing else bad happens,” said Chevron’s Haley.
The world consumes about 66 million barrels of oil a day, he said.
Within the energy industry--ranging from small independent operators to giant corporations--many watch the continued gyrations of oil prices with a sense of bewilderment.
“Yesterday and this morning some positive things were said--and the price of oil dropped four bucks in two days,” said Doug Eberts, managing partner of Driltek, an oil-drilling management firm in Bakersfield. “That’s how volatile it is.”
Doug Elmets, an Arco spokesman in Los Angeles, agreed that oil prices have become heavily influenced by news reports and rumors. “Today, there may be a sense in the marketplace that there might be a diplomatic solution. But, on Monday morning, there may be a rumor that Saddam Hussein has decided to invade Saudi Arabia.”
Nonetheless, Friday’s respite from fear about oil shortages heartened the bond market and helped trim interest rates. Prices of long-term U.S. Treasury bonds--which move in the opposite direction from interest rates--rose more than $5 for each $1,000 in face value.
