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Last Updated: Monday, 23 August, 2004, 21:56 GMT 22:56 UK
Oil price down as Iraq fears ease
Oil trader on the London International Petroleum Exchange
The price of oil has been grabbing headlines for months now
The price of oil has fallen back from recent record highs as the threat to supplies from Iraq eased slightly.

A resumption of pumping in northern Iraq, and a return of southern exports to normal levels following militia threats to pipelines, checked prices.

A barrel of October US light crude settled 84 cents lower at $45.21 while Brent Crude dipped 71 cents to $42.32

Analysts said that despite the short-term dip, prices could easily still bust through the $50-a-barrel mark.

Continued fighting in the Iraqi city of Najaf between US troops and militia loyal to Shia cleric Moqtada Sadr, prompted fears of fresh disruptions to supply.

Yukos fears

The market also remains jittery about the fate of Yukos.

The Russian oil firm said on Monday that it was cutting its production target for 2004 by 4.5%, amid reports that it could be landed with a further $3bn tax demand by the Russian government.

However, these fears were offset by positive news from Iraq on Monday.

Pumping resumed along the northern pipeline between Kirkuk and the Turkish port of Ceyhan at a rate of 450,000 barrels a day.

I still think we are in an upward trend
Bruce Evers, Investec
The pipeline has operated only sporadically since May.

Separately, officials reported that exports from the south of Iraq had returned to normal levels following threats by Shia militia to blow up pipelines feeding Iraq's two southern terminals.

Breathing space Despite Monday's falls, commodity analysts said that prices could return to levels seen last week, when September oil futures traded at more than $49 a barrel.

"We are taking a breather here," said Marshall Reeves, an analyst with Refco.

"We have pretty good news out of Iraq at the moment but we'll see how long that lasts."

"It is just a little bit of a pull back but I still think we are in an upward trend," said Bruce Evers, analyst with Investec.

A senior official at Opec, the oil producer's cartel, said on Monday that market speculation was partly to blame for the spectacular rises in oil prices.

"People say that 10 to 15 dollars a barrel is due to non fundamentals, to speculation," said Maizar Rahman, the organisation's secretary general.

Governments and companies have already spoken of the damage that spiking fuel and raw material costs are likely to do to global growth and corporate profits.

Many voices

Global banking and investment group HSBC predicts that as much as 0.9% may be shaved off the world's gross domestic product (GDP) during the next two years.

US growth is likely to be hit hardest, with US consumers and companies having to pay an extra $112bn (62bn) this year, according to the bank's figures.

Oil graph

"Rising energy costs will put pressure on profit margins if companies operating in competitive markets are unable to pass the higher costs on in prices," HSBC said.

"This squeeze may discourage investment and employment."

The Sunday Times reported that Wall Street brokerage Lehman Brothers has cut its 2005 growth forecast for the US to 3.3% from 4%.

Firms in the UK, meanwhile, are facing a jump of as much as 50% in their utility bills, the newspaper said.

Oil prices are "the big downside risk", it quoted Mike Dicks, a Lehman economist, as saying. "And it is happening when business confidence is already low."

Build up

What has made markets especially jumpy is that a number of negative factors have all come together just as the US, and many of Europe's main economies, start to emerge from a slowdown.

The recovery is being seen as increasingly fragile, with some analysts pointing to disappointing labour figures in the US and concerns that corporate earnings may have peaked.

On top of that oil producers are pumping flat out, while the threat of disruption to production in Iraq, Russia and Venezuela has been fanning fears that demand may eventually outstrip supply.

London International Petroleum Exchange
The market has been buzzing in recent months as prices surged

"Global growth will hit increasing headwinds as oil prices act as a drag," the Sunday Times quoted Peter Luxton of Informa Global Markets as saying.

"The recovery could be aborted and the "soft patch" could turn soggy for a more prolonged period. The growth bulls face castration."

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