Oil Price Drop Below $48
Oil prices made an about face Friday, falling below $48 a barrel, as tensions between U.S. forces and rebel fighters in Iraq eased, raising hopes that attacks against the country's oil infrastructure would subside.
U.S. light crude for September delivery dropped 84 cents to settle at $47.86 on the New York Mercantile Exchange, retreating from Thursday's record closing price of $48.70.
Crude futures have soared more than 50 percent in the past year, although when adjusted for inflation, oil is still roughly $9 less per barrel than it was leading up to the first Gulf War.
With the situation in Iraq delicate and the worldwide supply cushion razor thin at a time of robust demand, traders said oil markets would remain on edge for some time.
However, the prospect of an end to the 2-week-old anti-U.S. uprising in Iraq gave reason for oil markets to take a breather from a rally that has caused prices to rise by about 30 percent in the past six weeks.
"If things are not getting worse in Iraq that means they are potentially getting better," said Dan Lippe, an analyst at the Houston-based consultancy Petral Worldwide.
Militiamen loyal to rebel Shiite cleric Muqtada al-Sadr on Friday removed their weapons from the revered Imam Ali Shrine in Najaf as part of an arrangement aimed at ending their revolt.
Iraq's highest Shiite cleric, Grand Ayatollah Ali al-Husseini al-Sistani, agreed to take control of the shrine, which al-Sadr's forces turned into a stronghold, although an agreement on how to transfer authority has not yet been reached.
Analysts said a cease-fire was important because it would help Iraq bring oil exports, now at around 1 million barrels a day, back up to 1.7 million barrels a day — the output level before the latest uprising in Najaf.
The militia has repeatedly threatened to target Iraq's vulnerable oil infrastructure, especially the Gulf state's pipeline network, accentuating market fears about tight global supplies. On Thursday, members of the militia broke into the Basra headquarters of Iraq's South Oil Co. and set the company's warehouses and offices on fire.
"If the situation is alleviated and we get a peaceful settlement, oil prices could go down $2 really quick," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "It could mean that we'll see Iraqi exports back up to where they were before this conflict in a short time."
Still, the developments were greeted with cautious relief.
"The Iraqi situation seems up in the air every day," said Tom Bentz, a trader at BNP Paribas Futures in New York.
Analysts also cite the fear of more terror attacks in Saudi Arabia, the world's top producer, and the battle by Russian oil giant Yukos against bankruptcy as other factors behind the price surge.
Assuming that the latest truce in Iraq sticks, Lippe said "the most significant thing that we need to deal with ... is how the Russians resolve the problem with Yukos." The Russian government is trying to collect $3.4 billion in back taxes from Yukos — a move that threatens to weaken the oil giant's daily productivity of 1.7 million barrels, or 2 percent of global output.
With uncertainty in Iraq and Russia lingering, some traders have started to whisper about the possibility of $60 barrel if events take a turn for the worse in either place, even as the head of OPEC made soothing-but-vague comments about expectations of "a significant outcome" from its next meeting in September.
The Organization of Petroleum Exporting Countries President Purnomo Yusgiantoro said Friday in Jakarta: "I expect there will be a significant outcome from the meeting to overcome this big problem (of rising oil prices)."
Purnomo, who is also Indonesia's energy minister, told reporters OPEC will also meet with major non-OPEC oil producers at the meeting. He didn't elaborate.
Recent attempts by Saudi Arabia to halt the ascent of oil prices have failed.
The Saudis said earlier this month they were willing to put on the market an additional 1.3 million barrels per day, virtually all of their extra available production. But that only highlighted just how slim the margin for error is these days, with daily global consumption around 83 million barrels.
On London's International Petroleum Exchange, Brent crude futures for October delivery fell 79 cents to $43.54 per barrel.
In other Nymex trading, September heating oil futures declined by 3.59 cents to $1.2296 per gallon, while unleaded gasoline futures dropped 5.63 cents to $1.2673 per gallon. September natural gas futures rose 4.5 cents to $5.552 per 1,000 cubic feet.