Oil prices fall on Iraq handover

Iraqi oil production is now on the increase

Oil prices have fallen to two-month lows following the incident-free handover of sovereignty in Iraq.

After the low key ceremony in Baghdad, the price of a barrel of US light crude ended Monday down $1.31 to $36.24.

News of increased Iraqi output also helped cool oil prices; and Brent crude closed $1.27 lower at $33.70 a barrel.

Oil prices hit a record $42 a barrel in May, driven by strong global demand, supply bottlenecks and fears about continuing violence and unrest in Iraq.

Instability in both Iraq and Saudi Arabia, the world's biggest oil exporter, has fuelled oil price rises in the past couple of months.

The head of Iraq's State Oil Marketing Organisation said on Monday that exports from the country's two southern ports were now close to two million barrels a day (bpd).

Iraq's oil infrastructure has been repeatedly targeted by insurgents, holding oil production well below a pre-war capacity of 2.2 million bpd.

Continuing threat

Exports ground to a halt for six days earlier this month due to sabotage at two pipelines feeding the country's southern terminals.

But while Iraqi production is now growing again, and global oil prices falling, analysts said the situation in Iraq could easily worsen.

"The Iraqi handover may have gone ahead but the US-backed government is likely to be challenged with further sabotage against core facilities, including oil, and major supply disruptions look probable in the coming months," said Catherine Hunter of analysts WMRC.

Another downward pressure on oil prices is the resumption of normal output at Norwegian oilfields following a strike last week.

The Organisation of the Petroleum Exporting Countries (Opec) agreed in early June to raise its formal production limits by two million bpd from July 1 to cool prices.

It also said it would consider lifting output by a further 500,000 bpd from 1 August.