Oil Prices Plunge on Peace Hopes and Indications of Glut

Oil prices tumbled more than $3 a barrel Wednesday as traders reacted to suggestions that the Persian Gulf crisis may be resolved without war and an international energy body reported the world is awash in oil.

The drop in price came despite a vow by Secretary of State James A. Baker III before the Senate Foreign Relations Committee that the United States would use massive force if Iraq refuses to withdraw from Kuwait and release its hostages.

Crude oil futures for January delivery fell $3.37 to $27.29 a barrel on the New York Mercantile Exchange. The 11% drop put prices at their lowest level in three months.

Oil products also sank to their lowest levels since August, with unleaded gasoline for January delivery down 7.08 cents to 68.84 cents a gallon, and January heating oil down 5.76 cents to 81.14 cents a gallon.

Oil specialists said nervous sellers were reacting to two developments. A British television report said Iraqi President Saddam Hussein would be willing to withdraw his troops from Kuwait in exchange for oil and a promise of peace. In addition, the State Department said Iraq accepted President Bush’s proposal for top-level talks, although dates and details have yet to be arranged.

But oil experts cautioned not to read too much into the drop in price, because the market is so volatile.

“It’s a market trading on conjecture and greed. It’s just as susceptible to a $3 move on the upside tomorrow as it was to a $3 move on the downside today,” said Kenneth Nugent, an energy futures and options broker with Paine Webber Inc. in San Francisco.

Another development putting downward pressure on prices was a report by the International Energy Agency that world oil production, excluding the former Communist Bloc nations, is at a 10-year high. The IEA said there is more oil being produced now than was produced immediately before Iraq’s invasion of Kuwait on Aug. 2.

OIL PRICES TUMBLE West Texas intermediate crude price in dollars per barrel, daily close of January contract. Wednesday close: $27.29, down $3.37 Source: Reuters