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A black cloud is drifting down over Kuwait City from the nearby Iraqi oil fields. But so far, the Iraqis don't appear to have been able to repeat the economic and ecological disaster they set off when they torched Kuwait's oil wells before retreating back to their own country in 1991.
According to reports from the front, British and American forces have gained control of the Rumailah oil fields in the South, Iraq's key producer at 1.25 million barrels per day. Some seven oil wells are on fire, according to officials and local reports, but that's only a small portion of the 430 or so wells. Wells are less important than the big pieces of infrastructure in the fields, such as oil-gathering centers. Less clear is the fate of the other major oil area, Kirkuk, where some 800 thousand barrels per day are produced not far from the Kurdish areas in the north.
IN THE BLACK. It may turn out that one of the worst dangers from this conflict has passed. The markets certainly think so. On Mar. 21, benchmark Brent crude fell to its three-month low of $24.50, as fears of a major disruption faded. We're now getting an idea of how much of a war premium was in the price -- perhaps as much as $10 per barrel.
In the absence of a major outage, the world has plenty of oil. The Saudis are producing at a very high level of above 9 million barrels and are putting tens of millions of barrels in storage and on tankers headed for their major markets in the U.S. and Asia. Kuwait, too, is producing a very high 2.4 million barrels per day -- although analysts doubt they can produce more than 2.2 million barrels per day.
The OPEC countries are now worried that they could be facing an oil glut rather than a shortage. A senior Kuwaiti oil official told BusinessWeek Online that Kuwait is selling 300,000 to 400,000 barrels per day of their production through spot contracts, rather than longer-range term contracts to regular customers. That will allow the Kuwaitis to quickly cut back on production if such a glut materializes.
KEEPING THE BALANCE. Where the price will end up isn't an easy call. The long-run average price for oil is in the low $20s per barrel. If the war continues to go well, it's possible that prices could end up that low. What could hold prices higher -- say in the high-$20s per barrel -- is if supplies grow very tight, especially in the U.S., where crude stocks have been at near-record lows. The markets will worry that, with almost no cushion, any outage could once again send prices soaring.
The big OPEC oil producers, such as Kuwait and Saudi Arabia, will watch the situation carefully. They won't want the price drop to get out of hand. But they won't want prices to spike during a war. In addition, these producers have already made big money this year as prices reached around $36 per barrel. They may have no choice but to get along with a significantly lower level for the next few months.
Reed, London bureau chief for BusinessWeek, follows oils markets for the magazine and is in Kuwait City covering the war
For additional information on Iraq's oil industry, visit Platt's, which, like Business Week Online, is part of The McGraw-Hill Companies Edited by Douglas Harbrecht
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