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Oil gushes to 9-year high
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November 22, 1999: 12:14 p.m. ET
Prices reach highest since Gulf War as Iraqis reject oil-for-food extension
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NEW YORK (CNNfn) - Crude oil prices rose to their highest level since the Gulf War Monday after Iraq suspended oil exports under its humanitarian exchange program with the United Nations.
Crude oil for January delivery rose as much as 84 cents, or 3 percent, to $26.98 a barrel on the New York Mercantile Exchange, the highest since January 1991. In London, crude oil for January settlement traded at $25.75 a barrel, after rising as much as 83 cents, or 3.3 percent, to $25.90 on the International Petroleum Exchange in early trading.
Prices soared in London and followed in New York after Iraq Oil Minister Amer Mohammed Al-Rasheed over the weekend rejected a two-week extension by the United Nations of Iraq's current six-month oil-for-food export program. Baghdad rejected the extension and said all export contracts had now been met.
"There's speculation that Iraq's actions are going to impede the flow of oil, making it more expensive, in an already tight market," said Jim Falvey, an oil analyst with Boston-based Dresdner, Kleinwort and Benson. Speculation about an impending cold winter and an expected rise in demand due to Y2K-related stockpiling also pushed prices higher, Falvey said.
Supply cuts by other oil exporters have already left global inventories at their lowest level in more than two years. Now, Iraq's decision to reject an extension of its export program will take an additional 2.2 million barrels out of the Organization of Petroleum Exporting Countries' 75 million barrel quota, divided among major producers, analysts said.
"With refineries cutting runs, it was sort of inevitable that eventually inventories were going to decline," Falvey said. "Gasoline stocks are pretty low right now as well." Gasoil for December delivery rose as much as $7.50, or 3.5 percent, to $219.50 a metric ton, its highest level since January 1997.
The surge in oil prices left financial markets in a bit of a funk, particularly the U.S. bond market, as investors concluded that the rapid price gains will lead to faster inflation, which erodes bonds' fixed principal and interest payments. The 30-year benchmark Treasury bond fell more than a half-point in price, sending its yield up to 6.20 percent from 6.16 percent on Friday.
Rising inflation could prompt Federal Reserve policy makers to lift interest rates again in the new year to slow the economy down and curb potential inflation pressures. Higher rates hurt corporate profits by making borrowing more expensive.
General stocking up among suppliers ahead of Y2K also lifted the price of crude, analysts said. "There's usually a bounce-up in mid-December but we're getting it earlier this year," Falvey said. He added that he expects oil prices to rise higher, though not to the $30-mark some analysts have forecast.
The gain in crude prices helped European oil shares. BP Amoco Plc gained as much as 20 pence, or 3.2 percent, to 647 pence in London; Total Fina SA advanced as much as 2 euros, or 1.5 percent, to 136 euros in Paris, and Repsol-YPF SA rose as much as 0.52 euros, or 2.4 percent, to 21.97 in Madrid.
In the United States, stocks responded in more mixed fashion, with Exxon (XON) falling 1/16 to 79-5/8, Chevron (CHV) falling 1/4 to 92-15/15, BP Amoco (BPA) gaining 1/4 to 60-11/16 and Royal Dutch Petroleum (RD) gaining 3/16 to 69-9/16.
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