Iraq agitates oil market with "game' Source: Tulsa World Publication date: 2000-11-08 Arrival time: 2000-11-09

Crude oil markets could face further volatility this month as Iraq, OPEC's fourth-largest producer, steps up its battle to get decade-old United Nations trade sanctions eased, analysts said. Iraqi President Saddam Hussein has taken advantage of Middle East tension and faltering support for the embargo by pushing the issues of flights, trade and payments for its U.N.-supervised oil exports higher up the world body's agenda.

Hinting at a disruption of crude exports amid concerns over supply shortages during the Northern Hemisphere's winter also will remain a favored strategy, analysts said.

"The game is not as crude as simply threatening an (oil) embargo," said Rosemary Hollis, head of the Middle East program at the Royal Institute of International Affairs, a London-based think- tank. "It's about maintaining a level of uncertainty, maintaining anxiety" through perceptions rather than actions.

On Tuesday, crude oil and products futures rose sharply at the New York Mercantile Exchange, bolstered by reports that Iraq had halted exports from its Ceyhan port in Turkey for up to 24 hours.

After markets closed, industry data showed that U.S. inventories of crude remained basically unchanged from a week ago, but still about 10 percent below year-ago levels.

U.N. sources said Iraq had halted Ceyhan loadings until its oil revenue account was switched to euros from dollars. Iraq's euro account was set up Tuesday, they said.

"This is typical Iraqi policy, that of maximum annoyance to the West," said Mike Fitzpatrick, broker at Fimat USA Inc., a commodities brokerage firm.

Those annoyances could become more severe, however, analysts said.

Iraq, which accounts for about 4 percent of global crude oil supplies, has seen support for the sanctions weakening, notably in the Middle East. Six weeks of Israeli-Palestinian violence and Washington's distraction with the presidential election are also giving Baghdad space to confront the U.N., analysts said.

The next round of that confrontation could come as early as this month, with the reported reopening of an oil pipeline to Syria. The 200,000-barrel-a-day exports to Damascus would fall outside the U.N. oil-for-food program, which allows Baghdad to sell oil in return for basic necessities, and neither side has been reported as seeking the approval of the U.N. Sanctions Committee.

Iraq already exports crude oil to U.S. allies Jordan and Turkey outside the oil-for-food program and without objections from Washington.

The move to reopen the pipeline "reflects the widespread anger in the Arab world at the Americans' lack of even-handedness as far as the peace process and sanctions on Iraq are concerned," the Middle East Economic Survey newsletter said in its weekly report.

Still, not all analysts are convinced that the pipeline's Iraqi section, which has been closed for 18 years, is in a good enough condition to carry large amounts of crude oil.

A further flare-up could come in December when the oil-for-food program is due to be renewed for a further six months. Iraq last December halted oil exports for about three weeks in protest at the way the program was being run.

The United States, which led the multinational coalition that drove Iraqi troops out of oil-rich Kuwait in the 1991 Gulf War, has usually taken the hardest line within the U.N. Security Council against easing the sanctions on Iraq, which has the second-largest crude oil reserves in the world after Saudi Arabia.

The U.S. stance softened ahead of presidential elections as it sought to avoid a major escalation of tension in the Middle East, which accounts for a third of world oil supplies.

"Saddam is using this vacuum to his full advantage and is chipping away at the sanctions regime," said Lawrence Eagles, head of commodities research at GNI Ltd.

Baghdad's politically motivated demand last month to be paid for its oil exports in euros rather than U.S. dollars was given U.N. approval without U.S. objection.

Washington also has remained muted about dozens of foreign aircraft that have landed at Baghdad's main airport.

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-- Martin Thompson (mthom1927@aol.com), November 10, 2000