Doubts About Postwar Glut Send Oil Prices Up

Oil prices rose Wednesday as traders began to doubt whether a widely predicted postwar petroleum glut would develop in the Persian Gulf.

Looking beyond the Persian Gulf War, traders focused on a report showing a drop in U.S. petroleum inventories and indications that the Organization of Petroleum Exporting Countries may face pressure to cut back production.

“My perception is that the war situation is playing less of a role right now and that the market instead is focusing on fundamental supply and demand factors,” said Kevin M. Keely, risk manager with Chevron International Co. “There’s also been a lot of discussion about what OPEC will do and whether it will restrict output.”

Contracts promising delivery of light sweet crude oil for April closed at $18.86 per barrel, up 49 cents in trading Wednesday on the New York Mercantile Exchange. It was the third straight session that oil prices climbed higher.

The latest increase came hours before President Bush’s announcement of a conditional cease-fire and one day after the American Petroleum Institute surprised traders with a report that U.S. gasoline stocks dropped 2 million barrels last week to 227.2 million barrels, 18.2 million fewer than a year ago.

Since Iraq invaded Kuwait on Aug. 2, oil prices have been extremely volatile--first skyrocketing to an all-time high in October of more than $41 a barrel, then plunging a record $10 a barrel the day after the allied air war campaign was launched Jan. 16.

The rapid decline had fueled hope among some economists and U.S. officials that cheap oil prices would help pull the U.S. economy out of its recession by driving inflation down.

“An important reason for this (optimistic) assessment is that one of the most negative economic impacts of the Gulf War--the run-up in oil prices--has been reversed,” Federal Reserve Board Chairman Alan Greenspan told a Senate committee last week.

But government figures showed inflation surged in January despite the drop in oil prices. What’s more, there are indications that some OPEC members are growing restless with low oil prices and will seek an agreement at their March 11 meeting to cut production in order to drive prices higher.

As a result, analysts say they are considering such non-war factors as the apparent increased consumer demand for gasoline and heating oil as well as the political uncertainty that surrounds next month’s OPEC meeting.

“The market is returning to a more fundamentally traditional measure of pricing,” said Daniel Uslander, a principle with Hill Trading Co. “The war is almost over.”

Still, some analysts don’t see continuing price increases as a long-term trend.

“There is still quite a glut of crude oil on the market” and all indications are that it will remain that way unless OPEC members decide to drastically cut production, said Dennis Winters, an oil analyst with DRI/McGraw Hill in Lexington, Mass.