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Analyst: Looming Iraq Conflict Making Oil Markets Volatile - 2003-02-27


A respected oil market analyst, Philip Verleger, says the looming war in Iraq is making the oil market particularly volatile. The prices of crude oil are the highest in years.

Mr. Verleger told an audience at the Institute for International Economics that oil wholesalers are not buying oil right now, because they expect prices to decline sharply over the next few months. Mr. Verleger, a senior fellow at the [N.Y.] Council on Foreign Relations, agrees that prices are likely to fall but not by as much as the prices in the futures markets would suggest.

"My expectation is that there has got to be some slippage [in prices from the current $35 and higher]. I don't get the price down anywhere close to $20," he said. "But one thing you can do with this futures market modeling is ask how much inventories would have to rise to get the forward price down there. And you'd have to have sustained OPEC over-production of a million barrels a day over demand for six months to bring prices down towards $20 a barrel," he said.

Mr. Verleger says while private oil inventories worldwide are at a 28-year low, governments currently hold large reserves that, if released onto the market, could drive prices down. Michael Mussa, the former chief economist at the International Monetary Fund, says governments should release oil to the market to avoid having high priced oil trigger a global recession.

"The signals [from the market] are very powerful that it is time to use not only U.S. but other reserves to bring a top to world oil prices," he said. "Indeed with both a shortage of supply and a panic on the buying side, both of which have been affecting the price situation, in a circumstance where commercial inventories have been reduced basically to working levels and the prices are especially volatile."

The United States this week indicated that it is prepared to release oil reserves to the market.

Mr. Verleger says volatility in the oil market and high gasoline prices at the pump could push the U.S. economy into recession. He says the last three downturns have been triggered by high oil prices. This unusual volatility, he says, is in contrast to the relative calm that prevailed in markets in advance of the 1991 gulf war.

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