ENERGY : Oil Prices Fall on Rumors of Mideast Peace Initiative

Oil prices fell nearly $2 Wednesday, dipping below $27 a barrel, on speculation that Washington and Baghdad will reach a last-minute diplomatic solution to avoid a war in the Persian Gulf.

Traders said news that Secretary of State James A. Baker III may soon visit the gulf sparked selling, particularly as White House spokesman Marlin Fitzwater did not rule out direct talks between U.S. officials and Iraqi leader Saddam Hussein.

In trading on the New York Mercantile Exchange, crude oil for delivery in February closed down $1.95 at $26.49 a barrel, a loss of 7.9%.

Gasoline and heating oil prices also fell.

Iraq faces a United Nations deadline of Jan. 15 to pull out of Kuwait or risk an armed invasion by the United States and its allies. But traders warned of further volatility.

“One day it feels like peace and one day it’s war. There’s no way to call this market. It just follows the headlines,” said one trader.

Traders said early selling was sparked by speculation that a peace initiative may emerge from a European Community meeting scheduled for Friday.

Price swings were exaggerated by thin volume, they said.

In trading overseas, North Sea Brent crude for February loading closed at $26.90 a barrel on London’s International Petroleum Exchange, down $1.37 from Monday.