Oil world braced for fallout from war in Iraq

A prolonged conflict could push oil prices skywards while a brief showdown could generate a glut, according to industry research.

A war in Iraq could cause oil prices to skyrocket in the case of a prolonged conflict, although a brief showdown could cause a major market glut, a study by US oil experts has said.

Weighing the risks facing the global oil market in the coming months, the Energy Intelligence Group, a New York-based oil industry firm, said in a study published on its website that three factors would determine how disruptive a war in Iraq could be to global oil markets.

Meanwhile, US oil prices forged to fresh two-year highs yesterday as Venezuelan oil workers pledged to continue a 25-day strike until they forced the president, Mr Hugo Chavez, from power.

New York crude oil futures rose 53 cents to $32.50 a barrel, the highest level since January 2001. London's International Petroleum Exchange, which trades Brent crude futures, was closed yesterday.

The Energy Intelligence group said the timing and duration of a war in Iraq, the response of the Organisation of Petroleum Exporting Countries (OPEC), and the situation in Venezuela would determine how vulnerable oil markets were to a serious supply shortage.

In the most disruptive scenario, a war in Iraq starting in January would completely shut down the country's oil production by February until June. Although OPEC has said it would try to make up for a cut in a oil supply in the event of a war in Iraq, social tensions in Venezuela could hold back a recovery in its exports until at least the end of February.

Under this scenario, EIG said, the oil market could lose five million barrels per day (bpd) of production, which "would strain the global supply system to its limits".

"But the combination of OPEC supply increases and commercial inventories would be able to maintain a tight, but stable balance through the peak winter demand period, leaving a very lean spring market," the group said.

It added that in this scenario the oil market would be "extremely vulnerable to any perceptions of military or terrorist threats or damage to the oil facilities of Mideast producers near Iraq during the winter, or even the spring".

However, on the opposite side of the spectrum, a brief war, possibly starting in March and ending in May, could lead to a glut on oil markets, weighing heavily on prices.

Under this scenario, the group said, "the projected level of OPEC production in combination with the kind of short, swift war that Washington is planning for, would leave oil markets with a surplus this winter

"Stocks would build contra-seasonally during the first quarter and the stock accumulation would begin to become a major burden for the market by March or April, with usable commercial stocks projected to provide over 14 days of forward demand cover - usually a clear indicator of an emerging glut," it continued. The EIG said the prospect of war starting in January seemed to be fading.

Oil prices shot up to what was then a two-year high Tuesday in an abbreviated Christmas Eve session in New York on a wave of last-minute buying by operators playing the prudent card amid concerns over the continuing general strike in Venezuela and a possible war in Iraq.

The price of benchmark light sweet crude for February delivery, reached $31.97 a barrel.

- (AFP)