Oil prices continued to plunge Thursday, falling to their lowest levels since late August, in reaction to Iraqi President Saddam Hussein's order to free all foreign hostages being held in Iraq and Kuwait.
Traders read the news as a further sign that war and the consequent disruption of world oil supplies are not imminent.
Light sweet crude oil for January delivery traded as low as $25.25 a barrel Thursday on the New York Mercantile Exchange before recovering to settle at $26.40, down 89 cents from Wednesday's close. Prices had not traded that low since Aug. 29, when they reached an intraday low of $25.32 a barrel, traders said.
Talk of negotiations toward a possible peace agreement have pushed prices down 21% in the last week--well below the $41.15-a-barrel record reached Oct. 11.
Compounding the drop were reports out of the International Energy Agency that world oil supplies are at their highest levels in a decade.
If the Gulf crisis were to be settled peacefully tomorrow, some analysts believe that oil prices would easily plunge below $20 a barrel, lower than the $21 a barrel level in effect on the day before Iraq invaded Kuwait.
Prices of refined products also continued to fall Thursday. Unleaded gasoline for January delivery fell 2.34 cents a gallon to close at 66.5 cents--its lowest price since the crisis began.
Home heating oil for January delivery, also at its lowest level since late August, closed down 1.43 cents a gallon at 79.71 cents a gallon.
Most of the selloff of crude came amid heavy trading early in the day, when prices opened about $1.24 a barrel lower, continuing the plunge of the day before, when prices fell $3.37 a barrel on signs of peace.
"The NYMEX floor was a frenzy this morning," said Thomas Blakeslee, an industry analyst with Pegasus Econometric Group in Hoboken, N.J. "We are down on the news of the release of the hostages," as well as reports showing a surplus of world crude oil supplies, he said.
Traders reacted strongly to news that Saddam Hussein had told Iraq's National Assembly to release all foreign hostages.
"It's yet another step toward a peaceful negotiated settlement," Blakeslee said.
Contributing were reports quoting Iraq's ambassador to the United States saying that hostages could be released by Christmas, and other speculation that Iraqi officials had scheduled a news conference today.
The selloff bottomed out at $25.25 a barrel, an important psychological barrier, traders said. During the Exxon Valdez oil spill, oil prices peaked around that level, they said.
Prices edged upward after President Bush and Secretary of State James A. Baker III gave guarded responses to Hussein's proposal.
During a press conference in Chile, Bush reiterated that Iraq must still abide by the U.N. resolution calling for Iraq to unconditionally pull out of Kuwait.
"The Bush and Baker statements were not that conciliatory, and that helped the market to rally a little," said Andrew Lebow, a trader at E. D. & F. Man International Futures Inc. in New York.
Traders were divided about how low prices could dive in the next few days. "It would seem that barring any new news, a test of the lows would be unlikely," said Sal Gilbertie, a trader at Merrill Lynch.
But, said trader Ed Kevelson at Dean Witter: "Of two measurements I use, one shows oil going to $23.40 and one goes all the way down to $18. Take your pick."
Meanwhile, NYMEX officials on Thursday announced a series of steps to keep markets under control in the event of a war or other crisis that threatens to drive prices through the roof.
The NYMEX board of directors late Wednesday approved limits that would prevent oil prices from rising or falling more than $15 in any single day.
It would take quite a cataclysm to do that: The record one-day fall was $5.41 a barrel, reached during the current crisis on Oct. 22.
The new limits would be imposed in steps. If prices moved $7.50, trading would be halted for an hour and a new limit of $7.50 imposed. If prices reached the new limit, trading would be stopped again.
Similar rules were imposed on refined products, whose movements would be limited in two steps of 20 cents a gallon each.
NYMEX officials said they hoped that the new rules would be approved by the Commodity Futures Trading Commission by next Wednesday.