WAR REACTION : Start of Ground Fighting Unlikely to Boost Oil Prices

Oil prices are expected to remain stable or fall in reaction to news that ground fighting has erupted in the Persian Gulf, as traders focus on dwindling demand for and a global glut of crude oil, industry economists said Sunday.

Oil prices, which fell Friday to $17.91 a barrel in New York and $16.62 in London, are expected to open as much as $1 lower in trading today, barring unforeseen developments in the war, some analysts said. Others foresaw a brief spike then a return to the downward trend.

“I’m probably going to wish I never said this, because it’s hard to figure what the commodity markets do from day to day, but there probably won’t be an enormous response,” said Philip K. Verleger Jr., a visiting fellow and economist at the Institute for International Economics in Washington.

“Prices are set by the size of stocks, demand and production, and the battle in Kuwait is having very little impact on those,” he said.

Things could change if the ground war seems to be bogging down, if Iraq employs chemical weapons or if Iraqi jets suddenly enter the fray from Iran, analysts said. That could cause the psychology of the market to shift, sending prices up.

For now, however, initial news that the ground war was proceeding well should allay fears that oil installations outside Kuwait or Iraq are in danger, analysts said.

“If the war seems to go well, it will confirm the market’s perception that the war is essentially over, and it will increase the focus on basic supply conditions,” said Daniel Yergin, author of the best-selling book “The Prize,” which recounts the history of oil.

Of course, forecasting the movements of the oil markets is a perilous undertaking, particularly because the unpredictable psychology and fear of oil traders have played bigger roles in recent months than economic fundamentals.

Before the war began, when supplies were high, oil prices defied logic by shooting up to all-time highs in October of more than $41 a barrel--mainly on fears that war would threaten Saudi oil fields.

In January, the day after the allied air war commenced, oil prices again defied expectations by plunging a record $10 a barrel instead of spiking sharply. At that time, the market reacted to news that the war was going better than hoped, in effect removing the threat to Saudi oil fields.

Now, despite the ongoing war, oil prices are roughly where they were before the Persian Gulf crisis began with Iraq’s invasion of Kuwait on Aug. 2. And analysts and economists argue that the market will again perceive little threat to world oil supplies and therefore look beyond the current fighting to the postwar situation.

“The market has looked past the ground war . . . to see that the war will be over quickly,” said Peter Beutel, a market analyst with the Pegasus Econometric Group in Hoboken, N.J.

In the postwar period, several factors could drive prices as low as $14 or $16 a barrel before they bounce back to about $20:

* Demand for petroleum products should fall as winter ends and the recession continues to plague industrialized nations.

* Inventories are ample, including tens of millions of barrels of Saudi and Iranian crude oil in tanker storage around the world.

* Refineries normally enter a period of “turnaround,” or regularly scheduled maintenance, as spring months begin, further lessening demand for crude oil.

* Worldwide production of oil has more than made up for the 4.3 million barrels a day of Iraqi and Kuwaiti crude lost under the United Nations-sanctioned embargo, and production is expected to outpace demand in the foreseeable future.

Even without Iraq and Kuwait, members of the Organization of Petroleum Exporting Countries are producing an estimated 23 million barrels a day, higher than the pre-crisis quota level of 22.5 million barrels a day. But worldwide demand for OPEC oil is projected to fall as low as 21 million barrels a day by spring.

After the war, OPEC will have a major challenge in persuading members to scale back. Four OPEC ministers, none from Persian Gulf nations, are scheduled to meet in Vienna today. A full OPEC meeting is scheduled for March 11.

The overproduction problem could be exacerbated once Iraqi or Kuwaiti crude oil production is restored, although many experts believe that it will take months or years to repair damaged oil installations in those countries.

Other factors could complicate the postwar scenario.

Saudi oil fields that are producing at near-capacity to make up the loss of Iraqi and Kuwaiti crude and to fuel the allied war machine will probably require heavy maintenance once the war ends, said Edward Silliere, managing editor of Telerate Energy News Group. That could cut production from Saudi fields.

Moreover, if prices were to fall, that could put crude oil futures contracts into a condition called “contango,” where contracts for delivery of oil in near months are priced lower than contracts for delivery in later months.

That condition would encourage the building of crude inventories, which would fuel demand for oil, Silliere said.

In addition, high refinery profit margins resulting from low crude oil prices could stimulate operating capacities, further stoking demand for crude, he said.

Overall, Silliere used a single word to describe postwar oil markets: “Volatility.”