Crude Oil Price Jump On Bhutto Killing An Overreaction

The assassination of former Pakistani Prime Minister Benazir Bhutto lit a fire under oil futures Thursday, as jitters about politics in the region rocked a thinly traded, holiday market.

Prices later abated on the realization that an unlikely chain of events would have to transpire for Pakistan's political turmoil to constrict global oil supplies.

Oil futures were trading down 41 cents to $95.56 a barrel at 8 a.m. EST Thursday before Bhutto's injuries were first reported. They soon reversed course, reaching $96.70 at 9 a.m., then rising further to a fresh one-month high of $97.79 on reports of tighter U.S. crude inventories. Price moves have been exaggerated by light volumes that are typical for the week between the Dec. 25 Christmas holiday and New Year's Day.

Late in the day, some of the gains had been erased. Light, sweet crude for February delivery settled 65 cents, or 0.7%, higher at $96.62 a barrel on the New York Mercantile Exchange.

The jump underscores the oil market's strength at a time when the outlook for the broader economy is weakening. This is the third time in two months that oil futures have made a run at the psychologically significant $100-a-barrel threshold.

Pakistan is not an oil heavyweight, either in production or consumption. It pumps about 60,000 barrels a day, according to the U.S. Energy Information Administration. It consumes about 350,000 barrels a day, an appetite on par with that of Sweden. World oil demand now totals about 88 million barrels a day.

Yet Pakistan shares a border with Iran, the world's No. 4 oil exporter, and the government is struggling with Islamic extremism. Its status as a nuclear power and its willingness to cooperate with the U.S. in fighting terrorists heighten its international significance.

Traders say this context made Bhutto's death a reason to bid up oil.

"It adds further destabilization in a region that is already unstable," said Mike Fitzpatrick, an analyst at brokerage MF Global in New York. "You're right at the oil patch's doorstep."

Bhutto was fatally injured by a suicide bomber as she left a political rally in the military garrison city of Rawalpindi. She had spoken to thousands of supporters in the run-up to the Jan. 8 parliamentary election, from which she had been expected to emerge as prime minister.

Pakistani President Pervez Musharraf called for calm and placed security forces on "red alert," the highest level, as riots broke out in parts of the country. At least four people were shot dead in clashes in several cities, police said.

Bhutto's assassination will exacerbate instability in Pakistan, said Anthony Cordesman, a Middle East and energy expert at the Center for Strategic and International Studies in Washington, D.C. The extent of the fallout is uncertain given so many unanswered questions: who might claim responsibility, how repressive Musharraf's response would be and how much Musharraf reaches out to Bhutto's successor for inclusion in the electoral process.

Cordesman said oil traders' reaction, however, was irrational.

"I don't think you need another historical piece of data to prove that commodity traders in general are idiots and panic at the slightest opportunity," he said.

In a market where daily price moves of $2 or $3 a barrel have become commonplace, crude's jump Thursday was relatively modest. This "suggests the oil market may be taking a wait-and-see attitude" to the implications of the assassination, said Robert Johnston, the Washington, D.C.-based director of energy and natural resources at the Eurasia Group, a global political risk advisory firm.

The risk of political deterioration in Pakistan spilling into big oil producing states such as Iran or Saudi Arabia, or the prospect of greater U.S. diplomatic or military involvement in the region as a result of the assassination, lends support to crude prices.

"The market may be worrying about the implications of a U.S. foreign policy escalation or spillover into other Muslim countries," Johnston said. "The likelihood of either scenario is difficult to gauge."

Marvin Weinbaum, a former Pakistan analyst at the State Department Bureau of Intelligence now at the Middle East Institute, called the assassination a "destabilizing event of major proportions."

But the assassination shouldn't give crude traders any direct concern because Pakistan is an oil consumer, not an exporter, Weinbaum said. As for Iran, "I just don't see any connection, beyond the simple psychological effect that it has because it is that part of the world."

The Bhutto assassination is the latest in a string of global headlines of tenuous relevance to oil supplies. These headlines have boosted crude prices in a week of volatile trading. On Wednesday, reports of Turkish air strikes in northern Iraq helped propel crude to a one-month high.

"None of these stories really cost us a drop of oil," said Phil Flynn, a futures analyst at Alaron Trading Corp. in Chicago. "People are not really thinking about that; they are reacting to the headline of the moment."

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