The price of oil sank to two-month lows Monday, as supply concerns eased and traders bet that the transfer of political power in Iraq would reduce attacks against the country’s oil infrastructure.
But energy analysts were skeptical that the transfer of sovereignty, from the U.S.-led Coalition Provisional Authority to an interim Iraqi government, would quell opposition groups who view the nearly 140,000 U.S. troops in Iraq as evidence of continuing occupation.
“Will the handover lead to a cessation of bombings on pipelines? You’d like to think so, but it’s just too early in the game to think that everything’s going to be OK,” said Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington.
Ebel said speculators appear to have used the handover as a reason to hedge their bets, just in case the security situation in Iraq does improve.
Light crude for August delivery settled at $36.24 per barrel on the New York Mercantile Exchange, down $1.31, or 3.5 percent. In London, Brent crude futures fell $1.27 to $33.70 on the International Petroleum Exchange.
While the news out of Iraq helped to drive the price of NYMEX oil to its lowest level since April 7, analysts said it was only a marginal factor and that a drop in prices was expected anyway on Monday for a variety of reasons:
- Shell Exploration & Production Co. announced Monday that repairs were completed and oil production resumed on a platform in the Gulf of Mexico that was shut-in more than a month ago.
- The president of Saudi Arabia’s state oil company said Monday that the kingdom could make up for any shortfall linked to violence in neighboring Iraq.
- Pressure was taken out of the market late last week after the resolution of a labor dispute in Norway, the world’s third-largest oil exporter.
- An Iraqi oil official said over the weekend that the country’s exports now hover between 1.7 million and 1.8 million barrels a day — about the same level as before the war started in March 2003. That assessment came after repairs were completed on two oil pipelines in southern Iraq that were damaged by saboteurs earlier in the month.
“You have a lot of good news out there,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. The earlier-than-expected political transfer in Iraq — it was supposed to take place on Wednesday — just fed the momentum, Flynn said.
“I think the traders are really taking the news (of the power transfer in Iraq) as ’Boy, this may have some of the opposition in Iraq think twice before they start attacking oil pipelines,”’ Flynn said. “Now instead of attacking the U.S. coalition, they’re attacking the Iraq government.”
Still, there remains considerable nervousness in the market that terrorists might attack oil targets in Iraq, Saudi Arabia and elsewhere in the Middle East. Analysts said there exists a “terror premium” of at least several dollars per barrel to the price of oil.
“The market will still be susceptible to things blowing up,” said Jamal Qureschi, a market analyst at PFC Energy in Washington.
And because of limited refining capacity in the United States, analysts said more oil on the global market does not necessarily mean the nation’s supply of gasoline will increase significantly or that prices will drop dramatically.
While the retail price of gasoline has fallen in recent weeks, the average cost at the pump nationwide is about $1.92 per gallon.