The countdown to next Tuesday's deadline for Iraq to withdraw its troops from Kuwait is sending new jitters through the oil market, and many traders expect prices to move several dollars a barrel higher in the next few days as the risk of a possible supply-threatening war in the region intensifies.
Although the price of crude oil dropped slightly yesterday to $27.17 a barrel after a rise of nearly $3 Monday, many traders expect a run-up to begin as early as today if Secretary of State James A. Baker III's meeting in Geneva with Iraqi Foreign Minister Tareq Aziz fails to produce significant progress toward a peaceful settlement of the dispute.
"If those talks don't lead to any clear breakthroughs, and in short are not very productive, I think the market could go higher," said Ann-Louise Hittle, a senior oil analyst at Shearson Lehman Brothers Inc. in New York. "Jan. 15 really looms in the market."
"Let's say nothing happens between now and Jan. 15 except talk. We could see it edge higher," said Cynthia Kase, a veteran oil trader who is vice president of commodity risk management at Chemical Bank in New York.
But most traders also said higher prices may be short-lived if a peace settlement is reached within a few days of the deadline, or if it appears the stalemate will continue. Even the outbreak of fighting, they said, is likely to cause only a brief price "spike" to $50 or even $100 a barrel as it becomes clear that -- as many experts believe -- war between the United States and Iraq will not pose a serious threat to the flow of oil from the rich fields of Saudi Arabia.
In any case, as the Jan. 15 deadline nears, traders who have been handicapping the oil market since Iraq invaded Kuwait Aug. 2 are hastily preparing fresh strategies -- and alternates.
"I think basically most people's view on the thing is it's a total crapshoot as to what's going to happen," said a trader for a major international oil company.
"At this particular moment, the market is almost reacting day to day to headlines. One day it looks like peace, the next day maybe not," said Michael McDermott, an oil broker at Paine Webber Inc. in New York. "It's going to be a fairly interesting couple of weeks."
There are almost as many scenarios about oil prices over the next few days and weeks as there are oil traders. But most of those interviewed said they are fairly pessimistic about the outcome of today's talks between Baker and Aziz, and said they believe the price will move above the $30-a-barrel level by Tuesday's deadline.
After that, it's anybody's guess. "Until somebody either says something very clear or there's a shot fired, I think it's going to meander," said Kase, who nonetheless is among those who believe there will be fighting in the Persian Gulf that will cause prices to soar, at least in the first days of the conflict.
Most traders and analysts believe war will push the crude oil price past its record level of more than $40 a barrel reached in early October; a handful say it could go as high as $100, albeit briefly. "A war and prices could go back toward those highs," said Tom Blakeslee, an analyst at Pegasus Econometric Group Inc. in Hoboken, N.J. "You get Israel involved and it could very easily make new highs."
However, new rules adopted last month by the New York Mercantile Exchange, where crude oil futures contracts are traded, limit one-day oil price movements to $15 a barrel, about three times the largest move to date.
In addition, many analysts point out, the general surplus of crude oil production and supply around the world would tend to drag prices lower even if there is war.
"It may go up in a panic, but it's going to settle back down to the low $30s or high $20s, because from a supply-demand standpoint, that's what we're seeing," Kase said. Other traders said many of the oil market's players, skeptical that high prices can be sustained, may sell their positions for profits as the price spirals up, also putting a damper on the potential increase.
The more optimistic traders say the favorable supply-demand situation could cause prices to crash within a couple of weeks if there is no war. In this scenario, the price could rapidly fall below the $20-a-barrel level it was at before the Iraqi invasion of Kuwait. "We're down to $18 or $20 a barrel on oil if peace breaks out," one trader said. Others predict prices as low as $15.
In any event, traders said, the market will move quickly and dramatically once the outcome of the crisis becomes clear. "When this market does finally decide which direction it's going to go, it's going to move in dollar clips," said Tom Bentz, director of trading at United Energy Inc. in New York. Bentz, who believes the price could go as high as $35 a barrel as the deadline approaches, believes that just as the situation looks gloomiest, the crisis suddenly will be settled. "It's going to seem like reality -- war is going to happen," he said. "And then when everybody is in that mode, we're going to get a surprise... .
"I think we're going to see the tension build again, and the market build up" over the next few days, he said, "and then I hope it ends peacefully."