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Oil falls sharply as world still divided on Iraq

February 17, 2003 17:57 IST

Oil prices fell sharply on Monday after hitting two-year-highs last week and as international divisions gaped wide over whether to wage war on Iraq.

Sentiment also weakened after an OPEC source said the Organisation of the Petroleum Exporting Countries would likely suspend output quotas and pump oil at will should any war halt Iraqi crude supplies.

On London's International Petroleum Exchange, benchmark Brent crude fell 52 cents to $31.98 a barrel.

The US market is closed for Presidents' Day.

Traders said the market was weakening following the steep gains of last week, but that oil traders still believed war on Iraq was likely despite deep divisions in the international community and mass popular protests against a US-led attack.

"I think the market was overbought," said Christopher Bellew of Prudential Bache brokerage. "I think a war in the middle of March is still quite probable."

Fierce opposition to military action was demonstrated by a weekend of anti-war protests across the globe.

As the divisions rumbled on, European Union leaders gathered on Monday for an emergency summit on Iraq with most stressing war could only be a last resort and seeking more time for UN arms inspections.

On Sunday, President George W Bush's national security adviser, Condoleezza Rice, said talk of more time simply eased pressure on Iraq to comply with UN demands.

But Rice, speaking in a series of interviews with US television networks, left the door open for a compromise.

"We're prepared to work toward that end and we will see where we come out," Rice said when asked if she felt Washington could rally enough votes in the UN Security Council to authorise tougher action.

EU diplomats have said a relatively positive assessment of Iraqi cooperation by UN weapons inspectors on Friday, together with support for France, which wants more time for the inspections, blunted a US-British drive for an early UN resolution authorising war.

Supply Fears

Traders fear a war could disrupt supplies from the oil-rich Middle East, although analysts believe that if military action were swift and decisive, prices would spike, then fall sharply.

On Monday, an OPEC source said the cartel would probably agree to suspend temporarily output quotas and pump at will if an attack on Iraq halted exports from the world's eighth largest exporter.

"One or two countries could volunteer to make up for the loss of supplies should war start on Iraq, but they would need the blessing of other members," the source said, asking not to be named.

"It would be a temporary exemption, just as long as it takes to compensate for the loss and cool off the market," he added.

After any war, OPEC would return to its current ceiling of 24.5 million barrels per day, he added.

In the immediate term, supplies potentially face disruption from a strike over pay and conditions by senior Nigerian oil workers who supervise exports.

However, government and oil company officials said on Monday the action was having no immediate impact on crude exports.

Barbara Lewis in London
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