TODAY.AZ / Business

Oil jumps $1 as US, China demand holds strong

27 June 2006 [00:00] - TODAY.AZ
Oil jumped $1 Monday to nearly $72 a barrel on signs demand from the United States and China remained strong despite soaring energy costs.

According to Reuters, U.S. crude settled up 93 cents at $71.80 a barrel as gasoline prices gained on news of U.S. refinery problems. London Brent crude was up 77 cents to $70.70.

Gasoline rose as ConocoPhillips said it had reduced rates at its Lake Charles, Louisiana refinery due to a ship channel closing. Two other refiners have also said the channel disruption had affected their operations, sparking worries over supply during the peak summer driving season.

When adjusted for inflation, oil is at its most expensive since 1980, the year after the Iranian Revolution, and is holding within sight of its record of $75.35 hit in April.

High prices have yet to check buying from the world's two top oil consumers, the United States and China.

The U.S. economy is expected to perform well this year and next despite higher energy prices, the Federal Reserve said in its 2005 report. U.S. drivers are buying more gasoline than last year, despite paying almost $3 a gallon at the pump.

In China, implied oil demand surged 13.5 percent in May from a year ago according to Reuters calculations Monday based on official data, as refiners boosted output and curbed exports ahead of a domestic price increase.

But OPEC producers worry high prices are fueling inflation that could hit economic growth and dampen demand for their oil. Further evidence of higher inflation arrived Monday from the Bank for International Settlements.

"Inflation risks are now seen to be greater than they have been for some time," BIS General Manager Malcolm Knight said.

"To achieve and to continue to achieve low and stable inflation, central banks do need to bring interest rates back into positive real territory."

Prices have climbed 16 percent in 2006 as pension and hedge funds piled money into oil and investors fretted over supply disruptions, whether real or anticipated.

Qatar's Oil Minister Abdullah al-Attiyah said Monday that despite the soaring market, OPEC was having trouble selling some of its heavier crudes. He added OPEC would likely keep production rates steady when the group next meets in September.

"If oil prices are the same as today, we'll be rolling over again," he told reporters.

Iraq's oil minister sketched a positive production outlook Sunday, saying output had recovered to 2.5 million barrels a day -- the highest since the fall of Saddam Hussein -- and would rival top exporter Saudi Arabia within a decade.

At the same time, Baghdad offered a batch of crude from its troubled north, the second sale this month after nearly a year's halt due to sabotage on the Iraq-Turkey pipeline.

But analysts said Oil Minister Hussain al-Shahristani's bold targets should be treated with caution.

"Shahristani announced that Iraq hoped to be producing 4.3 million bpd by 2010, and perhaps less convincingly, suggested that Iraq would be challenging Saudi Arabia by 2015," investment bank Citigroup said.

"Few would choose to attribute a high level of confidence to these supply forecasts in the current environment."

OPEC's number two producer, Iran, repeated Sunday it stood ready to use its 2.5 million barrels per day (bpd) of oil exports in self defense if threatened by an international dispute over its atomic program.

However, Oil Minister Kazem Vaziri-Hamaneh said: "But using such a weapon in the normal situation in the country and oil markets would mean confronting the world and we do not have such a policy."



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