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2006-06-08 :: Big News of the Day

Oil below $70 after al Qaeda’s Zarqawi killed

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LONDON (Reuters) – Oil fell below $70 a barrel after U.S. aircraft killed al Qaeda’s Iraq leader Abu Musab al-Zarqawi on Thursday, raising faint hopes for a let-up in attacks on Iraq’s wrecked oil industry.

OPEC member Iran’s willingness to talk with opponents of its nuclear program to “solve misunderstandings” was another factor pushing oil away from its $75.35 a barrel record high, market participants said.

U.S. oil was $1.02 down at $69.80 at 1137 GMT, its lowest for two weeks. London Brent crude was down 85 cents at $68.34.

Chaos in Iraq and concern that the world’s fourth biggest oil exporter Iran could turn off the taps in its dispute with the West have added impetus to a demand-driven rally that has taken oil to its highest level in real terms for 25 years.

Analysts cautioned against reading too much into the killing of Zarqawi, who masterminded the death of hundreds in suicide bombings. He claimed responsibility for a foiled suicide boat attack on Iraq’s vital Basra oil terminal in April 2004.

Al Qaeda in Iraq vowed on Thursday to fight on.

“The end of Zarqawi will not be the end of threats to oil exports in Iraq,” said Mustafa Alani, an Iraq expert at the Gulf Research Council in Dubai.

John Kemp, oil analyst at Sempra, agreed Iraq’s oil sector, hobbled by decades of war, sanctions and underinvestment, may derive little benefit from Zarqawi’s demise.

“Zarqawi’s termination is a very big propaganda coup for the coalition, but I don’t think it’s going to have much impact on the ground. It isn’t that significant from an oil market perspective,” he said.

SGCIB oil analyst Deborah White said the drop in oil prices on Thursday was almost entirely “the Zarqawi effect.”

“This essentially means that the market is pricing in that Iraqi security will improve and so production can go back from say 1.85 million barrels a day to 2 or even 2.2 million bpd.”

Markets were split on how to interpret the latest comments from Iran where President Mahmoud Ahmadinejad said the Islamic state would “talk about mutual concerns and solving misunderstandings in the international arena.”

The president’s televised remarks came a day after Oil Minister Kazem Vaziri-Hamaneh said Iran could still use its oil exports for leverage in the dispute over its nuclear program.

Iran says it wants to develop nuclear power but the United States accuses it of harboring weapons ambitions and has demanded it stop enriching uranium.

U.S. DEMAND

Signs of slowing demand growth in the world’s biggest energy user the United States is slowly creating a sense among some producers that oil prices may have reached their peak.

OPEC President Edmund Daukoru told Reuters on Wednesday that accelerating inflation would likely feed through to higher interest rates, hurting demand for oil.

At the same time, former Federal Reserve Chairman Alan Greenspan said high oil prices were starting to have an impact on the U.S. economy.

And U.S. oil stocks data showed crude inventories unexpectedly rose last week while gasoline consumption eased.

Traders remain on edge over supply disruptions in Nigeria, the world’s eight-largest exporter, after militants attacked a Shell-operated facility in the Niger Delta, killing soldiers and kidnapping five South Korean contractors. A militant group said the South Koreans will be released later on Thursday.

(additional reporting by Ghaida Ghantous in Dubai, Barbara Lewis and Alex Lawler in London and Neil Chatterjee in Singapore)

Copyright 2006 Reuters