Oil Falls 9% to a Two-Month Low as Traders Bet on a Smooth War

Oil prices plunged 9% Tuesday to their lowest level in more than two months as traders bet that the impending U.S. invasion of Iraq would go smoothly and that global stockpiles of crude are sufficient to offset any supply disruptions.

The sell-off spread to gasoline futures, which had their biggest one-day decline in almost a year, bringing hope to motorists that pump prices may soon follow.

Crude oil for April delivery fell $3.26 to $31.67 a barrel on the New York Mercantile Exchange, its lowest close since Jan. 8 and the largest one-day drop in 16 months. Oil prices have fallen 16% since last Wednesday.

Still, with U.S. supplies low and uncertainty in the Middle East high, traders said petroleum prices were likely to remain volatile in the short term.

“This thing could go right back up,” said Tom Bentz, an analyst at BNP Paribas in New York. “We’re still vulnerable because inventories are tight.”

The most recent Energy Department data showed com- mercial stockpiles of crude at 269.8 million barrels, 18% below year-ago levels.

Supplies have dwindled as a result of high demand for heating oil in the Northeast and fewer imports from Venezuela, whose oil industry was crippled for months by a nationwide strike.

Yet Bentz and other traders mostly expressed confidence Tuesday that the loss of Iraqi crude could be made up elsewhere and that the U.S. gov- ernment would tap its own 600-million-barrel stockpile, the Strategic Petroleum Reserve, in the event of a supply emergency.

European countries have their own stockpiles that could help make up for any supply shortages resulting from war.

Industry watchers further said that members of the Organization of the Petroleum Exporting Countries -- with the exception of Iraq and Venezuela -- all are pumping more than their quotas, eager to take advantage of the high prices.

That extra supply could hit the market just as demand for gasoline, heating oil and other fuels drops to seasonal lows.

“There’s quite a bit of oil in vessels, and it’s now beginning to hit the consuming areas,” said Leo Drollas, chief economist for the London-based Center for Global Energy Studies.

U.S. gasoline stocks may increase as refineries boost production, imports rise and record pump prices trim motorist demand, traders said.

“There’s going to be more gasoline coming from Europe, and the price of oil is coming down,” said Craig Gile, an energy derivatives trader at Citibank. “With the high prices, there’s going to be some demand destruction.”

Gasoline for April delivery fell 6.52 cents to 96.19 cents a gallon on Nymex, the lowest closing price since Feb. 3 and the biggest one-day decline since April 12. Gasoline futures have fallen in six of the last seven sessions and were down 17% from a 21-month closing high of $1.1567 on March 10.

U.S. gasoline inventories probably declined by 500,000 to 700,000 barrels last week, according to a Bloomberg News survey. Gasoline supplies fell to 202 million barrels in the week ended March 7, down 7% from a year earlier.

The Energy Department’s weekly report on petroleum inventories is scheduled for release today.

Average gasoline prices climbed to a record $1.728 a gallon nationally and more than $2 in some cities, the Energy Department said Monday. AAA also reported a record price, with a U.S. average of $1.722. Prices have ranged even higher in California.