The price of a barrel of crude oil plunged more than $5 yesterday, its largest one-day drop ever, as oil markets swirled with speculation and rumors that a peaceful settlement to the Persian Gulf crisis had become more likely.
A benchmark barrel of high-quality crude for November delivery traded as low as $27.90 on the New York Mercantile Exchange before closing at $28.38, a $5.41 decline. It was the first time oil has been under $30 a barrel since Sept. 5.
"The market is going wild," said John Lichtblau, executive director of the New York-based Petroleum Industry Research Foundation. "There seems to be a view by now that the whole crisis is over."
Although such views may not accurately reflect diplomatic and military realities, they took on a life of their own in oil markets yesterday. The sharp decline in oil prices indicated that the oil market can be just as volatile and sensitive to rumors on the way down as it is, and was, on the way up. Analysts said the increase in prices after Iraq invaded Kuwait Aug. 2 reflected what they described as a "war premium" of $10 or $15 a barrel rather than what was justified by supply and demand factors.
Providing that oil prices don't rebound, yesterday's decline could eventually mean a decline in gasoline prices of about a dime a gallon, analysts said. But the reduction at the pump won't be any sharper than that because gas price increases have trailed the rate of increase in crude oil over the past 2 1/2 months. Unleaded gasoline prices have risen an average 27 cents a gallon to $1.38 since Iraq invaded Kuwait Aug. 2.
Any gasoline price reduction may be a few weeks in coming, experts said, because oil companies are expected to try to recoup some of the profit they've given up in operating their refining and marketing businesses at a loss in recent weeks.
The price of crude oil has fallen more than $11 in the past week and now is nearer the $20-a-barrel pre-crisis price than it is to the all-time high of $41.15 set two weeks ago. If prices stay down or fall further, it could give the U.S. economy a boost at a critical time. Soaring oil prices caused a sharp drop in consumer confidence in August and September and higher prices for gasoline and home heating oil -- as well as other items such as airline tickets -- meant consumers had less to spend for other things.
Falling oil prices, however, could undo much of that damage and possibly help stave off a recession. Since falling oil prices would also mean lower inflation in coming months, Federal Reserve officials likely would be more willing to reduce interest rates to keep the economy growing, analysts said.
Yesterday's oil sell-off began in the London market, where North Sea Brent Blend crude, the benchmark there, fell $5.65 a barrel to $26.75. The decline continued in New York and spread beyond crude oil into petroleum products -- wholesale heating oil fell 12.42 cents to 75.98 cents a gallon on the New York Mercantile Exchange, more than 30 cents below its high a few days ago.
"All the little remarks that are coming out are bearish to the market," said Suzanne Pearse, a broker at Dow International Energy Corp., a trading firm in New York. "We were due for a correction. This seems to be a bit much, but when you have hyped-up markets, they do strange things."
Oil traders and analysts attributed the sharp sell-off to a variety of indications of a possible peaceful solution to the gulf stalemate, including apparently conciliatory statements from Saudi Arabian Defense Minister Prince Sultan Ibn Abdel-Aziz that the Saudis might be willing to allow Iraq to keep some strategic parts of Kuwait if they withdrew unconditionally from the rest of the nation.
There also were unconfirmed reports that Iraqi troops were pulling back from the Saudi border and that there would be further releases of foreign hostages held by Iraq. Talks between Iraqi leader Saddam Hussein and former British prime minister Edward Heath also were seen as positive. And recent reports of oil supply and demand figures indicate that world oil supplies are almost back to pre-invasion levels while demand has been reduced by the high prices.
But perhaps the most unusual report to race through the oil markets yesterday was the rumor that Saddam had dreamed that Islamic prophet Mohammed had urged him to withdraw troops from Kuwait.
The French news agency, Agence France-Presse, citing Arab newspaper reports, said Iraqi troops had distributed a pamphlet in Kuwait last week saying that Saddam had been "visited in his dreams" by Mohammed. Saddam was said to have told other Iraqi officials that "the prophet showed himself to me in my dream dressed in white, and I could feel his disquietude." Specifically, the prophet was said to have advised Saddam to pull out of Kuwait and point his missiles away from his Arab neighbors.
Analysts suggested the story of the dream might have been floated by the Iraqis to provide Saddam a face-saving device for a withdrawal from Kuwait. But in any case, the report helped oil prices on their way down yesterday -- even though, as analyst Thomas Blakeslee of Pegasus Econometrics Group Inc. in Hoboken, N.J., said, "It's right out of 'Twin Peaks.' "
Experts said there was no guarantee that the decline in oil prices was anywhere close to permanent. Bad news from the Middle East could send prices shooting up again in an instant, they said. "I still think that there's got to be some war premium attached to the market. The crisis isn't over yet," said Andrew Lebow, an oil analyst for EDF & Man International Inc. in New York.
Staff writer John M. Berry contributed to this report.