Oil: Price falls US$2 after terrorism foiled

Oil fell more than US$2 to US$74 a barrel and US petrol futures tumbled a seven-week low on Thursday after Britain said it had thwarted a plot to blow up trans-Atlantic aircraft flights and investors recalled the slump in fuel demand that followed 9/11.

Oil consumption would again be hard hit if travellers turn away from flights and consumer confidence takes a knock. Jet fuel prices in particular moved down sharply in the weeks after September 11, 2001 and after the SARS outbreak in 2003.

US crude oil futures ended down US$2.35 or 3.1 per cent at US$74.00. London Brent crude futures settled down US$2, or 2.6 per cent, at US$75.28.

Robust US petrol has been a key factor in supporting oil prices throughout the summer, but the fuel settled for the first time since June 21 below US$2 per gallon.

US unleaded petrol futures fell 18.33 cents or 8.4 per cent to US$1.9899 per gallon as storm threats fizzled and supplies appeared adequate to get through the summer driving season.

Britain and the United States both stepped up security, causing severe delays at airports following the announcement of the reported plot, which a police source said was believed to involve a "liquid chemical" device. L10913913

"The market was already down before news from Britain of the foiled bomb plot against US aircraft, but with flights being canceled due to this development, it could hit consumer confidence, slow down traveling, the economy," said Tom Bentz, analyst at BNP Paribas Commodity Futures in New York.

The bomb plot news reined in oil prices that had risen to record highs this week on BP Plc's decision to throttle back output from its Prudhoe Bay oilfield in Alaska, the biggest in North America, because of unexpectedly serious pipeline corrosion.

Oil prices have been at or near record highs throughout the summer amid worries that limited global spare oil production capacity might not be sufficient to cover supply disruptions.

The selling intensified after Royal Dutch Shell said it had repaired a pipeline carrying crude from Nigeria's second largest oilfield, Bonny Light, reducing the amount of Nigerian oil production that is currently shut down by 180,000 barrels per day.

SUPPLY FEARS

Bank of America said it saw a risk of reduced oil demand but added there were still supply concerns.

"Higher fear of terrorism can also exacerbate the security of supply premium in the oil market. Following BP's shutdown of Prudhoe Bay, global spare capacity rests at about 1.5 million barrels per day, less than third of what we deem appropriate to balance the market. Continued risk for hurricanes and a deadline for Iran on nuclear proliferation should keep concerns high," it said.

US data on Wednesday showed an unexpectedly deep draw in petrol and crude inventories in the world's top consumer. The government data does not include the partial closure of Prudhoe Bay, which accounts for 8 per cent of total US output.

BP began shutting the field on Sunday after finding a corroded pipe. On Thursday the company said it had closed down another 80,000 barrels per day of production at the field, taking output down to 120,000 barrels per day.

A decision on whether to continue operating the western half of the field had been expected by Friday, but BP said on Thursday it was delaying this deadline to early next week.

In the meantime, BP has bought 3.5 million barrels of crude oil to supply its two refineries on the US West Coast, enough for seven days of operations.

Data on Thursday showed crude imports to China, the world's second biggest consumer, fell to their lowest level in 11 months in July. But at the same time imports of refined products were 137 per cent above year-ago levels.

Oil has soared 25 per cent this year on supply disruptions in Nigeria and Iraq, the dispute over Iran's nuclear programme and the war in Lebanon. Opec said in a statement it was ready to hold an emergency meeting ahead of its next scheduled gathering on September 11 if market conditions warranted.

- REUTERS