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Oil prices slide on OPEC hopes


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FACT BOX
GLOBAL OIL BALANCE
(millions of barrels per day)
Demand, May 2004: 80.6
Supply, May 2004: 81.5
Growth over 2003: 2.0
Source: International Energy Agency, May 2004
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Organization of Petroleum Exporting Countries (OPEC)
Saudi Arabia

(CNN) -- Saudi Arabia's oil minister has sought to calm jittery markets after crude prices hit record highs, declaring his country's oil infrastructure is secure against terrorist attacks.

The jaw-boning appears to have had some impact on oil traders with U.S. crude oil prices sinking 5.6 percent Wednesday.

Expectations that OPEC will raise its output quotas at Thursday's meeting in Beirut, Lebanon have also helped push prices down.

Oil Minister Ali al-Naimi, in Beirut ahead of the OPEC meeting, said Riyadh was "fully ready" to increase its oil production in an effort to trim soaring prices to the cartel's target range of $22-28 a barrel.

But al-Naimi insisted that a higher output would not solve the current high oil price because global demand was so strong and there was no current oil shortage.

The Organization of Petroleum Exporting Countries, he added, could not control the price of oil. Instead the group works to balance supply and demand, he said.

Crude oil for July delivery settled at $39.96 a barrel in New York, down $2.37 on the day, as it gave up almost all of the $2.45 it gained Tuesday.

July crude retreated from its overnight high of $42.45, its highest level in the 21 years that oil futures have traded on the New York Mercantile Exchange.

July London Brent prices slipped $2.20 to $36.88.

Tuesday's surge in prices was attributed to the weekend attack in Saudi Arabia on international oil workers that left 22 people dead.

The rally in oil prices cast doubt on whether an increase in supplies would be enough to stem prices that have been rising on the increased global demand and worries over the reliability of supplies.

"Today's prices have nothing to do with the fundamentals of the oil market. You might call it terrorism, you might call it expectations of the destruction of oil and gas facility," al-Naimi said.

"And increasing production will not necessarily solve the problem, but we need to reverse the perception, and this is what we will work for," he added.

Saudi Arabia -- the world's biggest oil exporter -- has a spare production capacity of two million barrels per day, the oil minister said, but admitted that the kingdom may not use its capacity in full.

"We have to be cautious and remember what happened in 1997 and 1998," when world economic crises led oil prices to plummet below $10 per barrel, al-Naimi said.

OPEC meets Thursday in Beirut and al-Naimi has said that Saudi Arabia would push the group to raise its output ceiling by 11 percent, or 2.5 million barrels a day. (Analysis)

Terror 'premium'

Despite Saudi Arabia vowing to keep oil supplies flowing and declaring that its production had been unaffected, analysts expect the "terrorist premium" on oil prices to rise in coming weeks.

Although oil facilities were not affected in the Khobar attack, analysts say the incident will heighten concern about supply security in the Middle East. (Two Saudi militants killed)

"This is the worst escalation in terrorism in Saudi Arabia we've seen. It shows these guys are serious and will attack again," Geoff Pyne, an independent energy analyst in London, told Reuters.

OPEC pumps out more than a third of the world's oil and Thursday's meet has gained more prominence.

Oil prices are up about 25 percent since the end of 2003. But while absolute prices are at their highest on record, in real terms oil is still cheaper now than it was in the 1970s. Oil reached the equivalent of $80 a barrel in 1979 after the second "oil shock."

The price of petrol, or gas, around the world has risen and many airlines are introducing or planning to introduce fuel levies on passengers.


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