Monday, June 27, 2005

Oil tops $60 on demand, Iran worries

Oil prices hit a new record above $60 a barrel Monday, driven by the resilience of energy demand in the face of high fuel costs and worries about oil policy under Iran's new hardline president.

U.S. crude for August traded as high as $60.65 a barrel and by 1535 GMT was up 71 cents at $60.55. U.S. crude is above $60 for every month until August 2006 with December 2005 setting a peak $61.90 a barrel.

London Brent set a record $59.21 a barrel before easing to $59.12, up 76 cents.

"The market is testing higher to see what price levels this demand can endure," said Naohiro Niimura, vice president at the derivative products division of Mizuho Corporate Bank.

Prices have risen as investors bet refiners and producers will struggle to meet winter demand in the fourth quarter.

While high prices are eroding some strength from the world economy, the overall growth picture remains solid, central bankers meeting in Switzerland said at the weekend.

"There was a general consensus that we will have high oil prices for at least the next two or three years," said Martin Redrado, Argentina's central bank governor.

That economic resilience has encouraged speculators to test consumers' ability to absorb higher costs, with only a significant pull-back in demand from an economic slowdown seen likely to tame prices.

Victory in Iran's presidential election for ultra-conservative Mahmoud Ahmadinejad also helped support prices.

Ahmadinejad has vowed to flush out corruption from the country's oil sector and favor domestic investors, although analysts do not expect a big shift in production policy.

"We don't know in practice yet what Ahmadinejad means for foreign oil policy or Iran's role in OPEC but there could well be months of uncertainty which will further delay progress on production capacity," said Iranian consultant Mehdi Varzi. READ MORE

Held back by U.S. sanctions, Iran has struggled to lift output capacity with foreign investment still severely restricted.

"I think Iran's capacity is actually falling," said Varzi. "It will take time but Ahmadeinejad may be able to streamline policy decisions which would encourage foreign investors."

The president-elect said his nation would press ahead with its controversial nuclear program, which the United States sees as part of an effort to build atomic weapons.

That is likely to stir geopolitical worries on oil markets sensitive to the chance of output disruptions when spare capacity is limited to small unused volumes in Saudi Arabia.

Dealers see tight market conditions running for at least another year, especially for distillate products such as heating oil and diesel.

Over the past four weeks, demand for distillates in the United States has risen nearly 7 percent from last year while gasoline consumption is up 2.5 percent.

The growth in distillate usage reflects strong consumption in the industrial and transport sectors, particularly in the trucking business used to ferry goods around the United States.

Dealers were undeterred by OPEC's largely symbolic output hike earlier this month. Now producers are consulting on another modest increase of 500,000 barrels a day.

Cartel president Sheikh Ahmad al-Fahd al-Sabah said a decision could come this week.

Saudi Arabia, the only OPEC producer with any spare capacity, says it is already meeting customer demand for crude.