What a year! Crude oil futures prices, as measured by the Nymex front-month West Texas Intermediate (WTI) contract, traded at a $12.59 per barrel range in 2003. What's more, the range was covered in just six weeks, going from a high of $37.83/bbl on Mar. 12, just before the US-led invasion of Iraq, to a low of $25.24 on Apr. 29, not long after the major fighting ended. Not that the volatility was limited to the war period -- the autumn saw intra-day trading ranges of almost $2/bbl as futures markets seesawed through months of highly speculative turbulence. This year may well hold more of the same.
A myriad other factors -- fundamental and psychological -- fuelled price gains and, as their impact waned, triggered reverses. They included, to name a few, significant supply disruptions from Venezuela, Nigeria and Iraq; rising political tension throughout the Middle East; and weather-related supply disruptions in the Black Sea.
But the war was the single biggest price-moving factor. An awesome display of overwhelming military might led to an equally breathtaking manifestation of post-military political ineptitude on the part of the US proconsular administration. Technological military superiority is of little use in close-contact peacemaking operations or in the more seductive pursuit of "hearts and minds."
The scale and speed of victory and the ensuing need for priority reconstruction and security pushed vital plans for Iraqi reconstruction to one side. The blanket standing-down of Iraq's military created an instant army of some 400,000 unemployed men trained in the use of arms and with the knowledge of where and how to obtain them; a wholesale demonization of the Baath Party membership paralyzed those bits of the country's administrative infrastructure that hadn't been destroyed; and a lack of cultural and ethnic sensitivity, combined with excessively lethal search-and-destroy missions, fueled resentments that in turn gave succor to the rapidly increasing armed resistance now threatening to turn into an underground war of attrition.
A fragmenting Iraq has long been the stuff of regional nightmares. But whatever the platitudes from Washington and London, it can no longer be banished as a specter of the night.
The success or otherwise of Iraq will have profound implications for the stability and political future of the rest of the Middle East. Influential US superhawks like Richard Perle and David Frum are now arguing for a tougher US foreign policy, stressing the need for immediate action against Iran, advocating active encouragement of a regime change in Syria, and calling for countries like Saudi Arabia-- and France-- to be treated as enemies rather than allies.
No wonder, then, that the so-called war premium that was built into oil prices during the 2002 preparations for the 2003 war has morphed into a semi-permanent political risk premium that may have helped propel WTI into a potential $30-$35 trading range.
Another factor was a series of increasingly aggressive speculative plays in the second half of the year. According to the US Commodity Futures Trading Commission (CFTC), speculative traders have since early August perpetually swung between holding very large net long crude futures positions and very large short positions. By the end of the year, the CFTC reported that speculators were net long 50,587 crude oil contracts, each of 1,000 bbl.
Author: Sam Maxwell
