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Forbes: Oil Fears Fade Slightly

Lionel Laurent, 10.18.07, 2:00 PM ET 
 
LONDON – Oil prices are gradually falling back from the $90 threshold, after hitting $89 on Wednesday’s news that Turkey had approved a full ground assault on northern Iraq to combat Kurdish guerillas.

Light, sweet crude for November delivery on the New York Mercantile Exchange was at $87.25 at midday Thursday, easing back from Wednesday’s record high of $89. December Brent crude also slipped 21 cents to $82.92 a barrel in London, returning to its usual position behind the U.S. West Texas benchmark. Their positions had reversed earlier this year following a refinery shutdown at Cushing, Okla.

“The supply-demand balance is going to stay tight, but not as tight as $90,” said Global Insight analyst Simon Wardell. He said that prices would continue to edge “a little bit lower” with the clearing away of much of the exaggeration surrounding Turkey’s plans.

Although parliamentary approval of a Turkish incursion into Iraqi Kurdistan on Wednesday spiked oil prices on fears that supplies would be disrupted, analysts are skeptical that Turkey will launch a ground invasion sizeable enough to disrupt the modest crude exports from Kirkuk in Iraq to Ceyhan in Turkey.

Turkey’s aim is to strike back at the Kurdish PKK group, which has been blamed for cross-border raids and several terrorist attacks on Turkish military targets. The 2003 U.S. invasion of Iraq seems to have contributed to a resurgence of the group’s activities, as the semi-autonomous Kurdish territory in Iraq continues to emphasize its distance from the central government of Baghdad.

But it is doubtful Turkey would opt to destabilize the country further, with a more likely option being small tactical operations that will not see an army bogged down in the mountainous area as winter draws in. The real impact on oil supplies is likely to be minimal.

According to the U.S. Department of Energy’s weekly report on Wednesday, traders have become increasingly keen to build up their safety cushion of oil stock in order to offset periods of heightened geopolitical risk.

“Tight supply conditions, against a backdrop of growing global demand, have tightened global inventories over the past 12 months, making markets even more anxious,” said the Department of Energy.

High oil prices are not always a boon for big international companies such as BP (nyse: BP – news – people ), Total (nyse: TOT – news – people ) and Royal Dutch Shell (nyse: RDS.A – news – people ), as the inflationary pressures affect investments across the industry.

“The industry struggles to pass on record high oil prices,” said Edward Westlake, analyst with Credit Suisse, citing poor third quarter performance for integrated gas and oil company stocks. He recommended Germany’s E.ON (other-otc: EONGY – news – people ) as an attractively valued play on rising oil prices.

The Associated Press contributed to this article.

http://www.forbes.com/markets/2007/10/18/oil-iraq-turkey-markets-equity-cx_ll_1018markets19.html?partner=topix

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