Oil Plummets on News of Bush Overture to Iraq
President Bush’s offer to initiate diplomatic contact with Iraq fueled optimism on world markets Friday, prompting oil prices to plummet more than $4 a barrel in the second-largest one-day drop on record.
For a day, thoughts of a recession were overshadowed by hopes for world peace as Wall Street stocks pushed strongly higher and bond prices rose as well.
Crude oil for January delivery dropped $4.06 a barrel to settle at $28.85 a barrel, the lowest level in six weeks, as traders on the New York Mercantile Exchange saw Bush’s remarks heightening the prospects for peace.
“Prices went through support levels like Rommel through Africa,” said Daniel Uslander, a trader and partner with Hilltop Trading Co. in New York.
The one-day fall was surpassed only by a $5.41-a-barrel drop on Oct. 22, when traders reacted in part to reports that Iraqi President Saddam Hussein had dreamed that the Prophet Mohammed told him his missiles were pointing in the wrong direction.
The dramatic fall in oil prices spurred a strong reaction on Wall Street, where the Dow Jones average of 30 industrial stocks soared 40.84 points to close at 2,559.65.
The stock and oil markets were apparently undeterred by sobering economic news out of Washington on Friday, as the Commerce Department reported that the Index of Leading Indicators, a broad measure of the nation’s economic health, fell 1.2% in October. It was a further indication that the economy was heading into a recession. It was the fourth monthly decline.
Shaking off recession fears, the benchmark 30-year Treasury bond rose $10.62 per $1,000 face amount.
Meanwhile, the dollar fell against world currencies. It dropped to 1.4965 German marks in New York late Friday from 1.5040 marks the day before. It was down to 132.55 Japanese yen from Thursday’s price of 133.15 yen.
Similarly, gold prices, which often rise on bad news and fall when the headlines are upbeat, dropped $5.60 Friday to $383.30 an ounce in New York.
On the Mercantile Exchange, crude oil for delivery in later months joined the fall, with most declines limited by exchange rules to $1.50 a barrel. Oil prices are now well below the record high of $41.15 reached on Oct. 11, during a period of high war fears.
Prices of unleaded gasoline and home heating oil were also down strongly. Unleaded gasoline for December delivery closed off 5.79 cents a gallon at 77.58 cents. Heating oil for December delivery was down 7.65 cents a gallon at 85.87 cents.
The plunge in crude prices came as President Bush made an opening statement at a nationally televised news conference in which he offered to send Secretary of State James A. Baker III to Iraq and said he would welcome a visit to Washington by Iraqi Foreign Minister Tarik Aziz.
There was no indication whether the proposals would be accepted, and Bush made it clear that the meetings were intended not to negotiate, but to inform Hussein of the United States’ position.
Still, “a lot of people took that as a peace overture,” said Kenneth Nugent, an energy futures and options broker at Paine Webber Inc. in San Francisco.
Almost immediately, prices that had been slipping around the previous psychological barrier of $32 a barrel fell sharply.
“We came off about $1.50 in a matter of about 10 minutes,” said Thomas Blakeslee, an analyst with Pegasus Econometric Group Inc. in Hoboken, N.J. “As soon as the news broke that Baker was going to Baghdad, it broke through the floor.”
Trading was heavy as prices crashed through various support levels. The effect was heightened by technical factors and computer selling.
“We compressed about four or five days of work into about 10 minutes,” said Uslander.
Even before Bush’s speech, oil prices had been languishing after Thursday’s news that the United Nations had adopted a resolution authorizing the use of force and setting a Jan. 15 deadline for Iraq to pull out of Kuwait.
“As President Bush was saying himself, the U.N. resolution was seen more as a step toward peace than toward war,” said Tom Bentz, director of trading at United Energy Inc. in New York.
Since it now seems unlikely that war will break out before Jan. 15, the deadline gave traders a reason to strip out some of the “war premium” that has been built into oil prices since Iraq invaded Kuwait on Aug. 2.
“It’s obviously the fear of hostilities and disruptions in supply that keeps prices high,” said Randall Rothenberg, a trader with Dean Witter Reynolds Inc. in New York.
Just before the end of trading, oil prices again fell sharply, hitting a low for the day of $28.70 a barrel before recovering slightly at the close.
“This break indicates that we will move back to the fundamentals (of supply and demand) as there is no immediate concern for war” in the next few weeks, Blakeslee said. Those fundamentals show an adequate supply of oil and falling demand.
For the immediate future, traders said they see the oil market testing the $28-a-barrel level, and perhaps even falling as low as $25 a barrel before rising again--unless, of course, there is some other unexpected news.
“The month of December should be an interesting roller-coaster,” Blakeslee said.
