Crude Oil Prices Spike, Retreat

Crude oil futures fell sharply from a new record high set earlier Tuesday on news that Iraq has resumed full exports a day after violence in the south of the country threatened the country's oil sales.

Iraq's Southern Oil Co. has resumed pumping oil to two key southern export terminals after reaching a deal with the Shiite militia that had threatened to blow up the pipelines unless the company stopped production.

"After agreeing with the al-Sadr militia, we resumed normal pumping of crude oil to the terminals," an oil industry source told Dow Jones Newswires.

Iraq exports about 1.7 million barrels a day of crude oil through its two southern terminals, Basra and Khor al-Amaya. Tanker loadings at the two terminals continued uninterrupted Monday and Tuesday, but the suspension of production had threatened to bring exports to a halt.

The news allayed concerns about the potential loss of oil supplies from the Middle East and Russia, where top oil producer Yukos is embroiled in a tax battle that many fear could force it into bankruptcy.

At the New York Mercantile Exchange, crude futures set for September delivery dropped as low as $44.20 a barrel, down 64 cents, after hitting a new all time high of $45.04 a barrel.

On London's International Petroleum Exchange, September Brent futures were down 38 cents at $41.18 a barrel. The contract had earlier set a new high of $41.69 a barrel.

The early rally came as the first tropical storm of the season to enter the oil-rich Gulf of Mexico heightened supply fears.

Tropical Storm Bonnie, which formed Monday, forced at least two companies operating in the Gulf of Mexico, including Shell Oil Co. to shut in production and remove non-essential personnel as a precautionary measure.

Tuesday's sharp drop in prices may turn out to be no more than a short-term correction, analysts said. With OPEC seen as increasingly powerless to influence oil prices because of its limited production capacity, traders continue to build into prices any potential threat to supplies.

"By no means does it change the overall trend," said Tom Bentz, an analyst at brokerage BNP Paribas Futures in New York.