Oil Plunges Record $5 a Barrel on Gulf Peace Talk

In a record one-day free-fall, crude oil prices plunged more than $5 a barrel Monday on talk of Middle East peace--including a report that Iraqi President Saddam Hussein dreamed the prophet Mohammed urged him to withdraw from Kuwait.

Technical factors, including the expiration of the November contract for light sweet crude oil, also contributed to a closing price of $28.38 a barrel, down $5.41 from Friday’s close in trading on the New York Mercantile Exchange.

“It’s like an Oakland A’s market: It’s fading fast in October,” said Kenneth Nugent, a broker with PaineWebber Inc. in San Francisco.

It was the largest one-day drop since futures contracts began trading on the Merc in 1983, surpassing the previous $4-a-barrel fall on Aug. 27. At one point during the day, the November contract traded at $27.90 a barrel, its lowest level since Aug. 31.

Before the Aug. 2 invasion of Kuwait, prices were about $21 a barrel.

Since last Tuesday, oil prices have fallen more than $10.50 a barrel. “They’re double-parking the hearses next to the Rolls-Royces,” said Thomas Blakeslee, an analyst with Pegasus Econometric Group Inc. in Hoboken, N.J.

The steep decline followed a flurry of Middle East news Monday that apparently wiped away war fears for the day--and with them, the so-called war premium that has raised oil prices as high as $41.15 nearly two weeks ago. Traders cited these items:

* A Kuwaiti newspaper reported that Saddam Hussein had a vision of the prophet Mohammed, who informed Hussein that his missiles “were pointed in the wrong direction.” The unconfirmed report in a newspaper published by the exiled Kuwaiti government in Saudi Arabia surmised that the story was an effort by the Iraqi government to prepare its people psychologically for a withdrawal.

* Unconfirmed rumors circulated among traders that Iraq was preparing to withdraw troops from southern Kuwait and amass them near a disputed oil field and offshore islands coveted by Iraq.

* Salim Mansour, leader of a U.S.-based Iraqi-American friendship society, was quoted as saying that Iraq may release American hostages. At the same time, British hostages were being released after a visit to Baghdad by former British Prime Minister Edward Heath.

* On Sunday, Saudi Arabian defense minister Prince Sultan Ibn Abdulaziz said that Arab nations might grant Iraq “all its rights,” which was taken as a sign that Arabs may consider land concessions to Hussein.

“Overall, people are thinking that a peaceful solution may be at hand,” said Ed Kevelson, a trader with Dean Witter energy futures in New York.

Crude oil prices tumbled even more on overseas markets. In London, the benchmark North Sea Brent Blend crude for December delivery closed down $5.65 a barrel at $26.75 a barrel.

On the Merc, refined products for delivery in November were also down by record amounts Monday. Unleaded gasoline closed down 11.41 cents a gallon at 76.5 cents; home heating oil was off 12.42 cents a gallon at 75.98 cents.

It was unclear whether Monday’s fall marked an end to the sharp bull market of the last three weeks or was just a correction in a market still jittery about the Middle East.

Traders looked for the December contract for crude oil to open lower on Tuesday, since its declines have been limited up to now by exchange rules. But, Nugent said, “this market can turn around on a dime on a headline indicating increased tensions in the Middle East.”

In any case, motorists should not expect retail gasoline prices to follow crude oil down. Analysts have said that retail and wholesale gasoline price hikes in recent weeks have not kept pace with the rapid run-up of crude prices, meaning that gasoline prices will remain high even if crude prices fall.

* PROFIT UP AT ENERGY FIRMS: Atlantic Richfield was among the oil firms posting third-quarter gains. D3