Fewer and fewer documentary credits have been opened for official sales of Iraqi crude over the past few weeks. It now seems likely that no more will be opened until a US-led attack on the country ruled by Saddam Hussain is complete.

In a wider context for documentary credits, at least one trade financier believes that uncertainty over the outcome of the conflict in the Gulf that now seems all but inevitable will result in traders shying away from open account terms and seeking sanctuary in letter of credit (L/C) transactions.

Oil trickle

Iraqi oil exports under the UN's oil-for-food programme have trickled to a halt, leaving ports such as Mina al-Bakr in southern Iraq, which can ship over one million barrels per day (b/d), idle for the time being.

Banks writing letter of credit (L/C) business for Iraqi oil exports confirm that legal trades of Iraqi oil have been drying up for some weeks. French bank Societé Generale used to do a small but steady business financing Iraqi crude shipments but according to Thomas Petitbon, the bank's commodities group director, concerns about war disrupting supplies led it to stop approving fresh L/Cs back in February.

Cancellation penalties

Reuters reports that the three banks mainly responsible for granting payment guarantees now refuse to back documentary credits. The news agency quotes an industry source saying "the banks do not believe there is sufficient time for a ship to load at Mina al-Bakr and get out before the bombs startdropping.this effectively means that Basrah Light oil exports have stopped for the time being."

Traders said that, in any case, they now were unwilling to book tankers as they face hefty cancellation penalties from ship owners if exports are cutoff, according to Reuters.

Price fears

Russian-owned oil trading firms acting as middlemen for Iraqi oil have also experienced increasing difficulty finding buyers because without sales invoices from refiners and other customers to use as collateral, these traders have had trouble obtaining bank financing for their own purchases from Iraq, according to Leo Drollas, chief economist at the Centre for Global Energy Studies.

Banks worry not only that Iraq might not be able to export its oil, but also that crude will lose some of its value if a war breaks out. If oil prices fall, that reduces the value of the cargoes serving as collateral for the banks and therefore increases the risk the banks will not be repaid.

Prospects

Iraq's two authorised export terminals at Ceyhan in Turkey and Mina al-Bakr in the Gulf were both idle on the morning of 17 March. The last vessel at Mina al-Bakr loaded the day before while the last sailing from the Mediterranean port left on 13 March according to local sources.

Official exports are not likely to resume at either port until a war with Iraq is ended. Smuggling of Iraqi oil - some the proceeds of which are reported to end up in Baghdad's official coffers - appears to be continuing for now.

Open account fears

Some trade finance professionals however are predicting a shift towards L/Cs in the event of a war between Iraq and a US-led coalition.

ABN Amro Bank's vice-president Gary Collyer told a Malaysian newspaper that "in situations of potential war, people who today are at a comfort level of doing business on an open account or non-committal type of transactional basis will move to a more secure level, which is L/Cs."

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.