Oil market astonished after UN-Iraq deal

Oil market astonished after UN-Iraq deal

LONDON (AFP): The oil market astonished the experts last week, by surging after the announcement of a deal between Baghdad and the United Nations which will allow Iraq to export oil for the first time since it invaded Kuwait in August 1990.

All analysts had expected the deal to spark a fall in oil prices because the market, which was already creaking under the strain of over-production, would then be flooded with a wave of Iraqi crude.

But Iraqi exports will not hit international markets for two to three months, UN Secretary-General Boutros Boutros-Ghali has said, and traders give more weight now to strong consumption of oil around the world and a temporary "tightening" in supplies.

The oil-for-food deal between Baghdad and the United Nations allowing limited sales of Iraqi crude to pay for humanitarian supplies did not send prices crashing as expected, but instead, actually the market a fillip.

On the London futures market, the reference price for Brent crude (for delivery in July) did plunge immediately after the deal was signed on Monday, to US$17 per barrel.

But soon after, oil prices began to surge, and climbed to over $19.

Analysts had expected the deal to spark a fall in oil prices of about $2 because the market, which was already creaking under the strain of over-production, would then be flooded with a wave of Iraqi crude.

Under UN resolution 986, Iraq will be allowed to export $2 billion worth of oil every six months, or about 700,000 barrels per day, the first sale of Iraqi crude on the international markets since a trade and oil embargo was slapped on Baghdad in August 1990 after troops invaded Kuwait.

One London analyst explained the price rise as a temporary "tightening" of the market, while another suggested that the increase reflected increased consumption of oil around the world.

However, he said that the rise in crude prices would not last. The next meeting of OPEC countries on June 5 in Vienna might call for an increase in the export quotas of exporting countries, he suggested, which would send prices into free-fall.

Current output by OPEC members is 1.5 million barrels per day above their own export ceiling of 24.52 million barrels per day. Members might be tempted to make this level of production permanent.