June 27, 2005

Oil nears $61 on demand and Iran worries

By Richard Mably

LONDON (Reuters) - Oil prices rose a dollar to a new recordnear $61 Monday, driven by the resilience of world energydemand in the face of high fuel costs and worries about oilpolicy under Iran's new hardline president.

U.S. crude for August delivery traded at a newhigh of $60.95 a barrel, up $1.11, before ending up 61 at$60.45. U.S. crude futures were above $60 for every deliverymonth to October 2006 with December 2005 scaling a peak $62.35a barrel.

London Brent set a record $59.59 a barrel for again of$1.23 before ending up 87 cents at $59.23.

"The market is testing higher to see what price levels thisdemand can endure," said Naohiro Niimura, vice president at thederivative products division of Japan's Mizuho Corporate Bank.

While high prices are eroding some strength from the worldeconomy, the overall growth picture remains solid, centralbankers meeting in Switzerland said at the weekend.

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

Economic resilience has encouraged speculators to testconsumers' ability to absorb higher costs, with only asignificant pull-back in demand from an economic slowdown seenlikely to tame prices.

"The only cure for high prices is in fact high prices,"said Nauman Barakat at brokers Refco in New York. "If you lookat demand globally, high prices have had very little negativeimpact."

Victory in Iran's presidential election forultra-conservative Mahmoud Ahmadinejad also helped supportprices.

Ahmadinejad has vowed to flush out corruption from thecountry's oil sector and favor domestic investors, althoughanalysts do not expect any quick shift in production policy.

"We don't know in practice yet what Ahmadinejad means forforeign oil policy or Iran's role in OPEC but there could wellbe months of uncertainty which will further delay progress onproduction capacity," said Iranian consultant Mehdi Varzi.

Held back by U.S. sanctions, Iran has struggled to liftoutput capacity with foreign investment still severelyrestricted.

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

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

That is likely to stir geopolitical worries on oil marketssensitive to the chance of output disruptions when sparecapacity is limited to small unused volumes in Saudi Arabia.

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

Market conditions for distillate products heating oil anddiesel are particularly tight.

Over the past four weeks, U.S. distillates demand has risennearly 7 percent from last year while gasoline consumption isup 2.5 percent.

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

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

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

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

(Additional reporting by Richard Valdmanis in New York)