Oil Prices Fall Sharply on Rumor About Iraq : Petroleum: Theory that Bush wants to lift embargo sparks selloff and cuts futures prices on distillates.

NEW YORK —  Oil prices fell sharply Tuesday in a selloff sparked by a rumor that President Bush wants to lift the embargo on Iraqi crude sales.

Light, sweet crude oil for delivery in February settled at $18.69 a barrel, down 52 cents, at the New York Mercantile Exchange.

Although many traders never believed the Bush rumor, once the selling started it picked up momentum and also pushed down futures prices for refined petroleum products.

“The snowball effect occurred,” said Thomas P. Blakeslee, an energy analyst at Pegasus Econometric Group Inc. in Hoboken, N.J. “The gasoline was hit the hardest.”

Unleaded gasoline for delivery in February settled at 53.07 cents a gallon, down 2.11 cents. Home heating oil for delivery in February settled at 50.88 cents a gallon, down .99 cent.

Oil prices surprised many traders by rising early in the session, but the rumor quickly killed the rally. Traders believe that new Iraqi crude sales would depress prices by creating a glut in an already well-supplied market.

Iraq has been banned from exporting oil since shortly after the invasion of Kuwait in August, 1990, but the Iraqis are hoping to soon persuade the United Nations to lift the embargo. Baghdad had rejected an earlier plan for oil sales, saying there were too many unfair restrictions.

“The late trading was on the speculation, the rumors swirling again, that President Bush was going to make a statement to lift the sanctions against Iraq,” Blakeslee said.

“The market is extremely susceptible to rumors and news right now and took that information wholeheartedly and sold off dramatically. A lot of people had to liquidate, and rather rapidly.”

Even though the oil traders sold, many remained skeptical, particularly since Bush may well have been asleep at the time, while on his visit to Japan.

“It doesn’t make sense,” said Victor Yu, vice president for futures at the Nikkhah Energy Group of Refco Inc. “It’s 4 o’clock in the morning in Japan.”

After the energy market was closed for the day, the American Petroleum Institute reported that the nation’s oil stockpile grew last week.

The supply of gasoline rose 5.4 million barrels, to 221.7 million, while the supply of crude rose 3.2 million barrels, to 328.7 million, for the week ending Friday. The supply of distillates, which include home heating oil, rose 0.5 million barrels, to 143.4 million.

The nation’s refineries were running at 85.6% of capacity, down from 87.0% a week earlier.

Separately, a survey of oil industry executives and analysts reveals that calls by some OPEC members to trim oil production to combat sinking prices went unheeded in December, and output continued to inch higher.

Crude oil produced by members of the OPEC countries rose 40,000 barrels a day to 24.14 million barrels a day, well above the cartel’s targeted ceiling of 23.65 million.

Analysts said they expect OPEC members to continue pumping at high levels even if Iraq agrees to a new U.N. formula that would allow it to begin exporting oil for the first time since August, 1990.

“Saudi Arabia will keep pumping where they are until the Feb. 12 OPEC meeting,” one company executive said.

Saudi Arabia, by far the biggest producer in OPEC, has been exporting crude at a steady rate of 8.35 million barrels per day, not including its 135,000-barrel-a-day share of production in the Neutral Zone, which it shares with Kuwait.

Iran on Monday joined Indonesia and Algeria in calling for a production cut to bolster prices. Iranian radio quoted Vice President Hassan Habibi as saying countries that glut oil markets are committing “treason toward their future generations.”

The request is seen as a direct challenge to Saudi Arabia, which is the only OPEC member with significant excess capacity.