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The Washington Post: Oil drops 1 pct on Mideast truce, Prudhoe Bay flow

By Jonathan Leff
Sunday, August 13, 2006; 11:04 PM

SINGAPORE (Reuters) – Oil prices slumped as much as 1 percent on Monday after BP said it would keep half its Prudhoe Bay oilfield pumping while it carries out pipeline repairs, and after the United Nations brokered a truce in the Middle East.

However, losses were limited by ongoing fighting between Israel and Hizbollah and concerns that a lasting cease-fire may prove difficult, keeping dealers on edge over supplies from a region that pumps a third of the world’s oil.
U.S. light, sweet crude was down 65 cents or 0.87 percent at $73.70 a barrel by 0214 GMT, having fallen as much as 75 cents in electronic trade. London Brent was down 54 cents at $75.09 a barrel.

Prices lost 41 cents over last week after a sell-off on news of a foiled aircraft bomb plot, which evoked fears of a cut in air travel and weaker consumer confidence, reversed earlier gains on BP’s move to shut North America’s biggest oilfield.

BP said at the weekend that it had decided to continue pumping crude from the western half of Prudhoe Bay, instead of shutting off the entire field, since pipeline corrosion on the west was less severe.

As of Saturday it was pumping about 150,000 barrels per day (bpd) from Prudhoe Bay and expected to ramp up output to 200,000 bpd — half of its full capacity, which normally accounts for 8 percent of U.S. production — after it completes maintenance.

“The sting in that event is obviously less than it was,” said Tobin Gorey, commodity strategist at Commonwealth Bank of Australia.

U.S. pipeline regulators gave BP clearance to use the western lines on Thursday, raising hopes that U.S. West Coast refiners would be less strained over the last month of the driving season.

The other half of Prudhoe Bay is expected to be off-line for months, possibly until early next year. BP said it had completed placing orders for all necessary replacement transit pipelines, which should be delivered in the fourth quarter.


Oil prices also eased after Friday’s U.N. Security Council resolution called for an end to the month-long war between Israel and Hizbollah, although fighting was still raging late on Sunday, hours before the truce was to take effect.

The United Nations said Israeli and Lebanese leaders had agreed the truce would begin from 0500 GMT on Monday, although diplomats warned that it was likely to be a fragile one.

Israeli officials said Israel believed it would be entitled to use defensive operations to prevent Hizbollah from rearming, while Hizbollah’s leader said his guerrillas reserved the right to fight Israeli soldiers on Lebanese soil.

Oil traders fear that a lasting war could draw in regional producers such as Syria or Iran, both supporters of Hizbollah, although CBA’s Gorey noted that prices had already fallen back from a record high $78.40 a barrel on July 14, just days after the war started to stir up regional supply fears.

“I think there’s not a whole lot (of gains) for the market to give up because a lot has already been priced out,” said Gorey.

Oil prices are up more than 20 percent so far this year as Nigerian militants cut about a quarter of the supplies from the world’s eighth-biggest exporter, and as OPEC peer Iran’s stand-off with the West over its nuclear programme keeps dealers on edge over a wider outage.

Royal Dutch Shell last week restored 180,000 bpd of Bonny Light crude production in Nigeria after a pipeline leak, but more than 400,000 bpd — shut since February — remains offline.

Soaring prices have yet to translate into a significant drop in consumption. U.S. average gasoline prices climbed 1 cent to a record high $3.03 a gallon over the past three weeks, according to the latest nationwide Lyndberg survey.

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