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OPEC stays course, oil may stay high
02.06.2006 14:00:27, AFX Europe Focus

Despite lobbying by Venezuelan President Hugo Chavez for
                           a production cut, OPEC decided to keep pumping almost as much oil as
                           it can for now, but the move may have little impact on soaring oil prices and
                           didn't ease concerns that the global economy could be damaged.
                           The agreement to keep crude production steady, reached Thursday by OPEC oil
                           ministers meeting in Caracas, will do little to ease prices that are being
                           driven by "violence in Nigeria and Iran's nuclear ambitions" said Fumiaki
                           Watari, president of Nippon Oil, Japan's largest oil company.
                           But the Organization of Petroleum Exporting Countries doesn't factor the
                           implications of such conflicts into its decisions about worldwide oil supplies,
                           OPEC President Edmund Daukoru told reporters Thursday after the group made the
                           "We don't model Armageddon," Daukoru said.
                           The group, which produces more than a third of the world's oil, instead
                           tries "not to get drawn into this kind of situation."
                           Daukoru added that current oil market conditions suggested there was no need
                           for OPEC to meet again before its scheduled Sept. 11 meeting in Vienna this
                           "Stock levels are on the high side, gasoline stocks are on the low side, and
                           the market looks as though it's balanced," said Daukoru, who is also Nigeria's
                           oil minister.
                           But Daukoru said tightness the market is currently experiencing, "may well
                           continue into next year."
                           Several OPEC ministers voiced concerns about rising global inventories and
                           suggested that the cartel's 28-million-barrel-per-day quota might need to be
                           trimmed later in the year if demand weakens.
                           In an official statement, OPEC said it maintains a "readiness to act swiftly
                           ... to safeguard the interests of member countries."
                           Yet for the time being OPEC put aside these longer-term issues to focus on a
                           more immediate problem: $70-a-barrel oil.
                           Qatari Oil Minister Abdullah al-Attiyah made clear that "at this price
                           level, OPEC won't cut production."
                           While high oil prices mean big profits for oil producers in the near term,
                           the longer-term risk is that they could cause a drop-off in economic growth and
                           spur the development of alternative energy sources.
                           Most OPEC members "don't want to send any signals to the market that there's
                           a floor at $70," said Yasser Elguindi, senior managing director at Medley Global
                           The cartel could face a more difficult decision in the second half of the
                           year if inventories continue to build and global economic growth slows, said
                           Michael Lynch, president of Winchester, Mass.-based Strategic Energy and
                           Economic Research.
                           "That can really accelerate weakening prices," he said.
                           In an apparent attempt to head off this possibility, Chavez, a longtime
                           price hawk, suggested trimming production now and repeated calls for OPEC to
                           establish a minimum price of $50 a barrel.
                           Chavez said an appropriate upper-end for prices would be "infinity."
                           Nigerian petroleum minister Edmund Daukoru said Chavez' idea was not
                           formally proposed to OPEC, so it wasn't considered.
                           Crude prices slipped on Friday, but still hovered above $70 a barrel on the
                           New York Mercantile Exchange. On Thursday, Iran's foreign minister welcomed the
                           idea of direct talks with the United States over its nuclear program, but
                           rebuffed the U.S. condition that Tehran first suspend uranium enrichment.
                           In spite of some concerns about slowing demand growth, oil prices are not
                           expected to collapse anytime soon, analysts said.
                           Daily global demand is expected to average nearly 85 million barrels per day
                           in 2006, and the world's producers are believed to have less than 2 million
                           barrels per day of excess production capacity that could be called upon in the
                           event of a supply disruption. Moreover, this surplus is made up of lower quality
                           crude oils for which there is scant available refining capacity, analysts said.
                           This thin supply cushion has left the market extremely nervous about any
                           threats to output, such as the West's diplomatic standoff with Iran, the war in
                           Iraq, violence in Nigeria and the Gulf of Mexico hurricane season.
                           "The market is precariously balanced," said Lawrence Goldstein, president of
                           the Petroleum Industry Research Foundation, a New York-based industry-financed
                           think tank.
Oil gains; market sceptical over US
                           offer for talks with Iran
02.06.2006 13:02:19, AFX Europe Focus

LONDON (AFX) - Oil prices continued higher, reversing two days
                           of falls, as
                           traders become increasingly sceptical about a US offer to join direct talks with
                           Iran over its nuclear programme.
                           Added to this are concerns over last week's jump in gasoline demand in the
                           US, which on Monday officially entered the peak demand summer driving season,
                           and over outages at two US refineries in Texas.
                           Further, analysts said OPEC's widely anticipated decision yesterday to keep
                           production levels unchanged was failing to weigh significantly on prices, as the
                           cartel's ability to move the market is more limited these days.
                           At 11.34 am, July-dated Brent contracts were up 46 cents at 69.85 usd, after
                           dropping 1.02 usd to close at 69.39 usd yesterday. Meanwhile, July-dated US
                           light crude futures were up 58 cents at 70.92 usd.
                           "Scepticism over the Iranian dispute abounds and the firm tone to the market
                           is likely to prevail. Expect crude to push through 72 usd over the next few
                           sessions," said Bank of Ireland analyst Paul Harris.
                           Prices fell on Wednesday after the US, in a major policy shift, said it was
                           ready to join the UK, France and Germany in direct talks on Iran's nuclear
                           programme if Tehran suspends uranium enrichment activities. 
                           Iran, however, rejected the offer, saying it was ready to talk to the US
                           over "mutual concerns" but that its "natural right" to uranium enrichment is not
                           up for negotiation.
                           "In order to... achieve some element of support from China and Russia, the
                           (US) offer was one that was perhaps almost forced," said Barclays Capital
                           analyst Kevin Norrish.
                           He added that "unless Iran backs down on enrichment fairly swiftly, and at
                           the moment we consider that unlikely, then this could be seen as another box
                           checked on the list that points towards a military solution."
                           The five permanent members of the Security Council plus Germany have reached
                           agreement on a package of incentives aimed at urging Iran to halt uranium
                           enrichment, which can be extended to make nuclear weapons.
                               The market is concerned the dispute may cause Iran, the world's fourth
                           largest crude producer, to withhold oil sales in retaliation for any UN action
                           against it.
                               It is also worried over US gasoline demand and over the Atlantic hurricane
                           season, which officially began yesterday, and which could wreak havoc on oil
                           installations in the US Gulf Coast, as it did last year.
                               US gasoline demand jumped to 9.43 mln bpd last week from 9.19 mln the week
                           before, the Energy Information Administration said yesterday in its weekly
                           inventory report.
                               The EIA also reported a rise of 0.8 mln barrels in gasoline stocks, which
                           have now risen for five straight weeks, but analysts said the market chose to
                           focus on the spike in gasoline demand.
                               Further, news that Valero Energy Corp cut gasoline output by 50,000 bpd
                           after a fire at its Corpus Christi refinery, while Citgo Petroleum Corp had to
                           restart a gasoline unit following a power outage, also supported the market.
                               Bank of Ireland's Harris said the fact that the news got so much play "shows
                           how much nervousness there is in the market and how narrow the gap is between
                           supply and demand".

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