Oil slips as war worries soothed by Iraq arms offer

Oil slips as war worries soothed by Iraq arms offer

Jonathan Leff Reuters London

Oil prices retreated to their lowest level in three weeks on Thursday, as the prospect of a U.S. war against Iraq appeared to recede and oil supplies looked healthy, dealers said.

Baghdad moved again to thwart the U.S. threat on Thursday, inviting the United States to visit Iraqi sites suspected of producing weapons of mass destruction.

London-traded benchmark Brent crude oil futures fell on the news, trading down 38 cents to US$27.75 a barrel after matching a three-week low of $27.60 a barrel. U.S. light, sweet crude oil was 40 cents down at $28.95 a barrel.

The fear of a U.S. invasion to unseat Iraqi President Saddam Hussein had driven prices to 12-month highs at over $30 a barrel the past few weeks, but now traders sense the pounding of the war drums has softened.

On Monday, U.S. President George W. Bush sounded a less hawkish note in his first major Iraqi address to the nation, saying no attack was imminent and that Washington would not act alone against Baghdad.

"The key issue is that Bush seems to be moving along the path pressing for international cooperation for military action against Iraq," said Lawrence Eagles of GNI Research.

"That reduces the risk of an international backlash and is therefore worthy of a reduction in the risk premium."

Already the price premium on a barrel of oil this December versus the end of 2003 -- seen by some as a measure of the "war premium" -- has dropped from a huge $6 two weeks ago to just $4 as traders see a reduced immediate risk to supplies.

Washington's push for an assault on Iraq was undermined by the release of a letter from the CIA reporting a low chance of an unprovoked Iraqi attack and a "pretty high" chance of Baghdad striking, perhaps with chemical or biological weapons, if the United States hit first.

The letter, released by Senate Democrats who want a broader debate on whether to attack Iraq, was unlikely to derail what are expected to be overwhelming votes in Congress to authorize Bush to use military force against Iraq.

But the larger debate continues at the United Nations, where Bush has the more arduous task of persuading the five veto- holding Security Council members -- notably France -- to approve a new resolution calling for tougher inspections.

France is pushing for two resolutions, one calling for new inspections and a second to deal with the use of force if Iraq refuses.

Baghdad has already agreed to the return of inspectors under existing U.N. resolutions and on Thursday took the unusual step of invited the United States directly.

"The American administration are invited to inspect these (weapons) sites," said Abdul Tawab Mullah Hawaish, deputy prime minister and minister responsible for Iraq's weapons programs.

"As I am responsible for the Iraqi weapons programs I confirm here that we have no weapons of mass destruction and we have no intention to produce them," he said.

While looming prospect of a supply disruption from the key Middle East region still hangs over the market -- particularly after this week's tanker blast off Yemen and the attack on U.S. Marines in Kuwait -- attention has also shifted back toward market fundamentals.

Although U.S. crude stockpiles last week fell to their lowest levels in over 20 years, dropping over 4.7 million barrels according to the Department of Energy, dealers saw little short- term shortage in the market.

The draw in stocks had been expected following a double-whammy of a hurricane in the Gulf of Mexico, which disrupted crude production and imports as well as reducing the critical refining facilities in the region.

But OPEC cheating kept prices off the $30 red-alarm mark as cartel members produced 2.33 million barrels per day (bpd) over their official quotas, a Reuters survey found this week.