The world of oil defied expectations on the second day of the Persian Gulf War.
Oil prices crashed Thursday in their biggest one-day fall. Oil companies froze or lowered wholesale gasoline prices. Lines failed to appear at service stations. And oil supplies remained ample.
One day after the United States and it allies launched a massive attack on Iraq, oil prices in New York plunged an unprecedented $10.56 a barrel to $21.44--a dime below its price on Aug. 1, the day before Iraq invaded Kuwait. The free fall confounded predictions that a war would cause oil prices to soar as high as $60 a barrel.
The crash reflected confidence that the flow of oil would continue--at least for now--and anxiety that there is otherwise too much oil for the world to absorb.
“If you had said to any trader (Wednesday) that we’re going to have a war tonight and tomorrow the market will be down $9 a barrel, they’d look at you as if you were a lunatic,” said Andrew Lebow, a trader at E. D. & F. Man International Futures Inc. in New York.
But oil prices could bounce back today if there are negative developments in the war, traders said. After trading closed in New York, oil prices started trading up $2 to $3 a barrel on cash markets and Asian exchanges Thursday night on news that missiles had struck Tel Aviv.
Meanwhile, oil industry executives and government officials Thursday repeated assurances that there was more than enough oil to go around, despite the ongoing war.
“Barring extraordinary circumstances, the outbreak of hostilities should not diminish the availability of crude oil and petroleum products during the near term,” said Exxon Corp. Chairman Lawrence G. Rawl in a statement.
In reaction, Exxon, American Petrofina Inc., Conoco Inc. and Marathon Oil Co. dropped their wholesale gasoline prices Thursday. Exxon dropped prices by 5 cents a gallon, Fina by 3 to 5 cents, Marathon by 10 cents and Conoco by 6 to 8 cents. Other companies were expected to follow suit.
Ironically, several oil companies that had frozen gasoline prices Wednesday night found themselves in the embarrassing position of explaining that the freezes were not intended to keep gasoline prices high.
Prices were frozen, they said, to avoid dramatic increases at the pump that might spur panic hoarding. But that didn’t mean prices couldn’t fall, executives said.
“There’s no floor. It’s a ceiling until further notice,” said Richard J. Stegemeier, chairman of Los Angeles-based Unocal Corp., which was the first oil company to announce a freeze.
Atlantic Richfield Co., Chevron Corp., Mobil Corp., Phillips Petroleum Co., Shell Oil Co., Sun Co. and Texaco Inc. joined Unocal in saying that they would freeze wholesale prices of gasoline and other refined products.
The moves won unexpected praise from a staunch industry critic. “It’s an act of corporate patriotism, and I salute them for it,” said Sen. Joseph I. Lieberman (D-Conn.), who has accused oil companies of profiteering in the crisis.
The record-breaking free fall on the New York Mercantile Exchange caught traders, government officials and oil industry executives by surprise. “This market was thrown around like a toothpick in a tidal wave,” said Peter Beutel, an energy analyst with Pegasus Econometric Group in Hoboken, N.J.
The price plunge on oil markets followed a brief surge Wednesday night in after-hours trading.
It was, in part, a reaction to word that the International Energy Agency in Paris would make available 2 million barrels of oil a day from strategic reserves within 15 days. The IEA also said it would save an additional 500,000 barrels of oil a day through conservation and fuel switching.
About half of the drawdown--or 1.125 million barrels a day--will come from the 586-million barrel U.S. Strategic Petroleum Reserve and will be available Feb. 15, Energy Department officials said. The oil, in salt domes in Texas and Louisiana, is to be released for 30 days. Other oil will come from Germany, Japan and the United Kingdom.
“The world feels that the Iraqi war will be a very short-lived affair, and hopefully they don’t have the capability of knocking out Saudi oil production,” said George H. Babikian, president of Arco’s refining and marketing unit. “And if that doesn’t happen, there’s plenty of crude oil around.”
In light of the current oversupply of oil, analysts questioned whether any reserves would be necessary.
Analysts estimated that industrialized nations have about 100 days’ supply of oil in commercial inventories. Another 100 million or so barrels of crude produced by Saudi Arabia and Iran is believed to be in tankers or in land storage well away from the Persian Gulf War and readily available for sale.
Babikian estimated that West Coast supplies of gasoline were 10% higher than normal.
In a press conference in Washington on Thursday, Energy Secretary James D. Watkins said vital Saudi Arabian oil fields and loading terminals escaped virtually unscathed during the first day of the war.
The only damage to oil facilities came from an Iraqi artillery strike on a 200,000-barrel storage tank in the neutral zone between Kuwait and Saudi Arabia, where production had been curtailed much earlier, Watkins told a news conference.
On Thursday, oil company spokesmen said they were unaware of attempts by motorists to hoard gasoline, although there were isolated reports of gasoline lines Wednesday night.
Most major oil companies have instituted limits at loading terminals on the amounts of gasoline and other refined products that they will sell to wholesale distributors and other customers to prevent panic buying by them, as well. Oil companies also said they had strengthened security at refineries and other facilities against possible terrorist attacks.
As war fears calmed on oil markets, traders stripped out the so-called war premium from oil prices and attention focused back on the fundamentals of supply and demand: a worldwide glut of crude oil and falling demand because of the economic downturn.
Those conditions dictate oil prices in the $15- to $22-a-barrel range, analysts said. Once the war ends, and until the current overproduction can be scaled back, oil prices could fall to as low as $10 a barrel, said Philip K. Verleger Jr., an economist with the Institute for International Economics in Washington.
Beutel predicted that retail gasoline prices could fall to as low as $1 a gallon or lower.
In heavy but orderly trading, light sweet crude oil for February delivery fell to its lowest levels since the Persian Gulf crisis began almost six months ago. Traders called the one-day fall “humongous” and “mind-bending.”
The fall was similarly dramatic in refined products. Futures contracts of unleaded gasoline for February delivery closed down 21.9 cents a gallon at 60.29 cents; heating oil for February delivery closed down 29.64 cents a gallon at 61.96 cents.
Thursday morning, oil trading opened $7.50 below Wednesday’s close, immediately triggering a NYMEX “circuit breaker” that halted trading for an hour at 10:01 a.m. After trading resumed, prices continued to fall to a low of $21.10 a barrel before recovering some.
Oil traders who had “gone long"--that is, bought oil contracts Wednesday in anticipation of even higher prices in the event of war Thursday--scrambled overnight to liquidate positions to avoid margin calls on the New York Mercantile Exchange, traders said.
“There were hundreds of millions of dollars of margin calls,” said Mercantile Exchange Chairman Z. Lou Guttman, “four to five times those of a normal day.” They were all settled, he said.
Robert Baker, a spokesman for Salomon Inc.'s Phibro Energy Inc., one of the nation’s largest oil trading firms, denied “categorically” persistent rumors on the NYMEX trading floor Thursday that it was having trouble meeting such calls.
Times staff writers Robert A. Rosenblatt and James Risen in Washington and Robert E. Dallos in New York contributed to this story.
INDUSTRY UPDATE Twenty civilian airlines--including Federal Express and United Parcel Service--were put on notice that the Pentagon might soon call into service up to 40 long-distance cargo airplanes to help resupply troops in the Persian Gulf.
Initial reports of the outbreak of war in the Persian Gulf seemed to have little impact on consumers’ already pessimistic outlook. In a nationwide telephone survey of 135 households taken after President Bush’s televised address Wednesday night, 45% of those polled by a Chicago market research firm said they planned to curb their personal spending because of concerns related to the fighting.