Petroleum prices drop sharply despite Iraqi pipeline attacks

WASHINGTON -- Oil prices dropped sharply to about $42 a barrel on Monday, as last week's selloff continued despite sabotage of Iraqi oil infrastructure that curbed exports.

"It just goes to show you that when the psychology turns, it turns," said Tom Bentz, a trader at BNP Paribas Futures in New York.

Light sweet crude for October delivery plunged by $1.53 to $41.65 in midday trading on the New York Mercantile Exchange. At that level, crude futures were trading roughly 14 percent below the record settlement high of $48.70 on Aug. 19.

Oil markets have been extremely volatile this summer because traders fret there is inadequate excess supply globally in the event of a prolonged output disruption in Iraq, Russia or Venezuela.

But with the exception of sporadic dropoffs in Iraqi oil exports due to attacks on industry infrastructure, none of these fears has materialized.

Oil-price speculation by institutional investors, including hedge funds, magnified this summer's surge in prices, as well as the latest retreat, traders said.

On Monday, senior officials at Iraq's state-run oil company said that oil exports had come to a halt after a rash of insurgent attacks on the country's petroleum infrastructure. The officials of the South Oil Co., speaking on condition of anonymity, said the lines were not likely to resume operations for at least a week.

Other reports, however, suggested the damage was less severe.

Regardless of just how badly the oil flow has been damaged, "two weeks ago, with that news, we would have been up more than $1," Bentz said. "The tide has definitely turned."

Also on Monday, OPEC's president said the cartel was "doing everything it can to restore and stabilize oil prices."

Paradoxically, that too might have contributed to higher prices earlier in the month, since many market participants believe the Organization of Petroleum Exporting Countries has very little excess production capacity with which to calm jittery markets.

On Monday, traders just "brushed it off," said Mario Chavez, vice president of global energy futures at ABN AMRO in New York.

Chavez said the sharp move downward was also magnified by thin trading volume.