Of oil and turmoil

It has been an established fact since the emergence of the black gold — when there is political turmoil, there will be lack of supply, and then prices skyrocket. But, in fact, this was not exactly what happened following the execution of former Iraqi President Saddam Hussein, who was hanged at the dawn of Saturday 30 December after a U.S.-backed Iraqi court found him guilty of crimes against humanity and sentenced him to death for his role in killing 148 Shi’ite villagers after a failed attempt on his life in 1982.
A day before the hanging of the former Iraqi leader in Baghdad, on 29 December 2006, crude oil rose on speculation that the execution might cause an upsurge of violence in Iraq, and thus threatening oil supplies. Crude oil for February delivery rose 52 cents, or 0.9 per cent, to close at $61.05 a barrel on the New York Mercantile Exchange. Oil experts and analysts were bracing themselves for a chaos in Iraq that would result in a significant reduction in supply.

Analysts’ fears were understandable given the fact that Iraq has the world’s third largest proved oil reserves, according to BP PLC, and any tumult there could raise the prices to unprecedented highs. Although a series of bombs were detonated in the streets of Baghdad and Kufa the day that followed the hanging, oil prices unexpectedly fell below $61 a barrel three days following the execution. US light crude traded 20 cents lower at 60.85 a barrel in Globex electronic trading, reversing the eve of Saddam’s execution’s late rise. Also, London Brent Crude prices fell ten cents to hit $61.76.
Many argued that the curve of prices didn’t take an upward turn because the execution was not followed by widespread violence as was expected since the announcement of the verdict a few months ago. Only a series of daily routine bombings that killed about 72 people ensued the hanging, but it didn’t turn into a bloodbath. In addition, analysts said, mild weather persisted in the United States, the world’s number one energy consumer, thus helping the prices to take a downward turn.
Temperatures in the U.S were hovering around 16 degrees Fahrenheit above the norm at that time. And this warmer-than-average temperatures continued for many days following the hanging of the former Iraqi leader. “This mild weather that we’ve been experiencing now for some two months [in Europe and the U.S] has meant that at the moment demand is slack,” maintained Rob Lachlan of Man Financial. “I would suppose it is the most dominant factor in the market over the last seven days [before the execution of Hussein],” he added.
Other experts concurred. “The primary driver is the abject lack of cold weather to date this season,” said John Kilduff, senior vice president of energy risk management at Fimat USA. “It’s taking a lot of the anxiety out of the market in terms of sufficiency of demand,” he added. Another factor that explains the decline in oil prices, according to Kilduff, is that “in the aftermath of the execution of former Iraqi dictator Saddam Hussein, the country, which is mired in instability and violence, did not see a spike in carnage or an increase in damaged oil infrastructure.”
But was it just the mild weather conditions and the muted reactions to the execution of Saddam that kept oil prices hovering around $60 dollars?
Absolutely not. The news that Russia and Belarus have agreed on a last-minute deal on gas prices just a few days before the execution helped ease the worries of European energy consumers. Russia, in fact, provides Europe with about a quarter of its gas needs, and a great amount of the Russian gas is exported to Europe via Belarus. Therefore, if this row persisted, gas supplies to Europe would have been disrupted, thus converting consumers to depend on oil imports.
Nevertheless, analysts argue that Iraqi oil is not the only or even the most important force at work. This could be right, given that OPEC has increased its membership for the first time in 30 years by admitting Angola. This decision has taken effect since the beginning of 2007.
While some analysts believe that oil prices will decrease this year to trade between $60 and $55 a barrel, especially if there are no new political crises, others argue that they will rise above $62 especially after OPEC announced it would cut production from February 1. The 11-member group agreed to cut output by an extra 500,000 barrels a day, following a production cut in November. “We don’t think this [fall in prices] will last very long,” said Tina Vital, an oil analyst for Standard & Poor’s Equity Research.
Prices hit highs of over $78 a barrel in mid-July last year at the summit of the Israel-Hezbollah war. Other factors pushing up prices last year included fears of trade sanctions against Iran during the nuclear crisis, and unrest in Nigeria. Demand for oil has also been boosted by China’s rapidly-growing economy and thirst for energy.
With the never-ending political havoc, oil prices will remain vulnerable.


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