Jet Fuel Soars To Five-Year High

A delay in Iraq's oil-for-food deal pushed the market sharply higher, but dealers said underlying demand from airlines caught short of fuel had already driven prices near to record levels.

Most of the airlines simply got it wrong, said a trader at a Wall Street bank who sells to airlines.

Airlines and package holiday companies have been scrambling to buy fuel in recent weeks for next year's holiday season after missing the boat earlier in the year, he said. They didn't want to buy in the spring because of high prices and then they thought Iraq would come back sooner than it did, he added.

 

Last spring Brent crude hit its highest level since the Gulf War due to low oil stocks and tightness in the US during the summer many airlines delayed buying in the hope that oil prices would fall when began Iraq exporting again.

Iraq's invasion of Kuwait in 1990 sent jet fuel prices to record levels when military demand for jet by the US-led coalition sent prices soaring.

The delay in the oil-for-food deal, announced by UN Secretary general Boutros Boutros-Ghali on Sunday, pushed the premium for jet fuel higher on Monday morning. The deal had been expected to come into force this month.

Dealers said jet for fourth quarter 1996 was bid at $40 a tonne above IPE gas oil futures. This is some $7 below the big premiums seen during the spring, but the absolute level of $239 a tonne is higher due to strong gas oil. The underlying gas oil market also hit five-year highs yesterday and is the driving force behind strong European oil prices.

Stocks of heating oil are low in the key German and US markets, new green rules for diesel have pushed prices higher and low refinery runs are keeping supplies tight, traders say.

Sources at one of the largest airlines in the world said physical supplies of jet fuel were also tight.

We haven't seen nearly as much from the Mediterranean as last year. It is mostly going to Asia or down to West Africa at the moment, one source said.

Meanwhile, Asian crude oil prices surged to a four-month high yesterday after the UN delayed limited oil sales by Iraq after Baghdad sent troops into Kurdish areas, traders said. Simex October Brent futures rose 82 cents to $21.60 a barrel in early trading from Friday's London close

. in response to UN secretary general Boutros Boutros Ghali's announcement on Sunday that he would delay the oil-for-food plan until he could assess the situation in northern Iraq.

Singapore gas oil swaps soared 50 US cents per barrel in early trade.

Oil prices began slipping from their highs around midday and lost further ground when UN relief officials and guards said Iraqi troops, heavy armour and artillery had evacuated Arbil. As of 0700 GMT October Brent had lost 30 cents from its high and was trading at $21.30.

All Iraqis have left Arbil. We cannot see any more tanks or vehicles or artillery. They are about five kilometres (three miles) away now, one UN official in Arbil said.

There was no immediate reaction from the United States where President Bill Clinton had been conferring with American allies on how to respond to the Iraqi move.

Asian oil traders said they were now awaiting more news from the United Nations and the United States, the leader of the Gulf War coalition which defeated Saddam Hussein in early 1991 but left him in power.

While the news (of the withdrawal) may cause levels to drift lower, the market would remain supported until we hear more of UN's decision on the oil deal, one broker said.

Boutros Ghali said he had decided to delay the deployment of certain personnel who will supervise the implementation of Resolution 986, a reference to the Security Council document that sets out the oil-for-food plan.

The $2-billion oil-for-food plan would allow Baghdad to sell oil over six months to buy food and medicine in a temporary easing of UN economic sanctions imposed after Iraq invaded Kuwait in August 1990 and triggered the Gulf war.

Before the delay was announced, Baghdad had hoped to resume oil sales this month. Iraq, which holds the world's second largest oil reserves behind Saudi Arabia, has been effectively barred from oil shipments since the invasion.

The world oil market has been watching the plan's progress closely, fearing prices would slump when up to 700,000 barrels of Iraqi oil per day begins flooding the market.

Clinton has placed US forces in the region on high alert and spoke by telephone on Sunday to several world leaders, including British Prime Minister John Major and Saudi Arabia's King Fahd, about the crisis.

US officials, however, said Arbil was not in the zone placed off limits to Iraqi troops at the end of the Gulf war, oil traders noted. But US officials said it was within the no-fly zone and UN resolutions broadly protecting Kurds against repression applied.

We are watching the market closely. It will be a news-driven market for a while until the deal eventually pulls through, a broker said.

Brokers also noted that White House officials have said that the deal would go through because of its humanitarian aims despite criticism from Republican presidential candidate Bob Dole.