Oil: Price falls after Zarqawi killed

Oil fell briefly below US$70 a barrel Thursday, after US aircraft killed al Qaeda's leader in Iraq, Abu Musab al-Zarqawi, raising faint hopes for a let-up in attacks on Iraq's wrecked oil industry.

Iran's willingness to talk with opponents of its nuclear programme to "solve misunderstandings" was another factor pushing oil away from its US$75.35 a barrel record high hit in April, market participants said.

There was also growing evidence that persistent high energy costs were feeding inflation in the United States and other big importers, forcing up interest rates and hurting demand for oil.

US crude settled down 47 cents to US$70.35, after dropping as low as US$69.10, its lowest since May 22. London Brent crude fell 14 cents to settle at US$69.05.

Chaos in Iraq and concern that Iran, the world's fourth biggest oil exporter, could turn off the taps in its dispute with the West have added impetus to a demand-driven rally that has taken oil to its highest level in 25 years in real terms.

Analysts cautioned against reading too much into the killing of Zarqawi, who masterminded the deaths of hundreds in bombings. He also claimed responsibility for a foiled suicide boat attack on Iraq's vital Basra oil terminal in April 2004.

Al Qaeda in Iraq vowed on Thursday to fight on.

"The end of Zarqawi will not be the end of threats to oil exports in Iraq," said Mustafa Alani, an Iraq expert at the Gulf Research Council in Dubai.

John Kemp, an oil analyst at Sempra, agreed that Iraq's oil sector, hobbled by decades of war, sanctions and underinvestment, may derive little benefit from Zarqawi's demise.

"Zarqawi's termination is a very big propaganda coup for the coalition, but I don't think it's going to have much impact on the ground. It isn't that significant from an oil market perspective," he said.

SGCIB oil analyst Deborah White said the drop in oil prices on Thursday was mainly "the Zarqawi effect." "This essentially means that the market is pricing in that Iraqi security will improve and so production can go back from say 1.85 million barrels a day to 2 or even 2.2 million bpd," she said.

Markets were split on how to interpret the latest comments from Iran, where President Mahmoud Ahmadinejad said the Islamic state would "talk about mutual concerns and solving misunderstandings in the international arena." The president's remarks came a day after Oil Minister Kazem Vaziri-Hamaneh said Iran could still use its oil exports for leverage in the dispute over its nuclear programme.

They also coincided with a report by the United Nations' nuclear watchdog that Iran had begun fresh uranium enrichment.

Iran says it wants to develop nuclear power, but the United States accuses it of harboring weapons ambitions.

Signs of slowing demand growth in the United States, the world's biggest energy user, were slowly creating a sense among some producers that oil prices may have reached their peak.

A draft Group of 8 communique, seen by Reuters on Thursday, said high oil prices may damage the world economy more in the future than they have done so far.

The president of the Organisation of Petroleum Exporting Countries, Edmund Daukoru, told Reuters in an interview on Wednesday that accelerating inflation would probably feed through to higher interest rates, hurting demand for oil.

At the same time, former Federal Reserve Chairman Alan Greenspan said high oil prices were starting to have an effect on the US economy.

And US oil stocks data showed crude inventories unexpectedly rose last week while petrol consumption eased.

- REUTERS