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CNBC: Oil corrects lower on profit taking but Turkish conflict, supply fears underpin

22 Oct 2007 | 07:47 AM ET

LONDON (Thomson Financial) – Oil was trading lower midday as the market continued to correct from last week’s highs, with investors largely opting to cash in their gains amid a decline in the European equity markets this morning. Fears that slowing economic growth could cut demand for oil are also weighing on the market after the IMF said this weekend that recent turmoil in the financial markets could moderate expansion. Traders shrugged off news that the conflict between Turkey and Kurdish rebels in northern Iraq had escalated into violence over the weekend, with tensions in the region already largely priced into the market. However the spat, plus continued weakness in the US dollar — in which oil futures are denominated — and fears supply will fail to keep up with demand over the winter are putting a floor in prices, analysts said.

“Oil prices were lower this morning, despite bullish news, amid continuing profit-taking after strong recent gains that have driven the market to 90 usd a barrel,” said analysts at Sucden. “However, crude futures continue to draw support from mounting geopolitical tensions in addition to the weak dollar and fears about tight supplies.” At 12.20 pm, London’s benchmark Brent crude contracts for December delivery were down 1.04 usd at 82.75 usd per barrel. Meanwhile, New York crude contracts for November delivery, which expire today, were down 1.20 usd at 87.40 usd per barrel. Prices rallied to fresh all-time highs on both sides of the Atlantic last week amid fears that the stand-off between Turkey and Kurdish rebels affiliated with the Kurdish Workers’ Party, or PKK, could impact supply. Iraq has around 115 bln barrels of crude reserves, most of them located in the north of the country. Analysts had feared an escalation of Turkish action against the PKK could lead the group to target the Iraq-Ceyhan and the Baku-Ceyhan pipelines, which deliver oil through Turkey to the Mediterranean coast.

However, news that the conflict had escalated into violence over the weekend, resulting in 44 deaths, was largely ignored by the market this morning, as were reports that seven workers at a Royal Dutch Shell oil platform in southern Nigeria had been kidnapped yesterday. “The numerous geopolitical tensions that could well impair the oil supply are sufficiently factored in at the moment in our view, and we expect the correction on the oil market to continue in the next few days,” said analysts at Commerzbank. Elsewhere Kuwait’s acting oil minister Mohammad al-Olaim said OPEC’s agreed production output increase of 500,000 barrels per day from Nov 1 could bring down the price of crude oil. “We believe supply and demand will be influenced positively once OPEC production is increased by 500,000 barrels a day” to cut the price of a barrel of crude, al-Olaim said. The Organization of Petroleum Exporting Countries decided in September to pump over 500,000 barrels per day more from Nov 1 to lower prices.

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