Oil falls after Iran contacts US

Oil falls after Iran contacts US

May 9, 2006

World oil prices fell Monday on hopes tension over OPEC member Iran's nuclear ambition will ease after Tehran made an unprecedented move to contact Washington.

US light crude for June delivery settled down 42 cents at $US69.77 per barrel while June Brent crude shed 74 cents to $US70.21 a barrel.

US crude oil futures had fallen as low as $US68.25 a barrel in intraday trade on word of the letter Iranian President Mahmoud Ahmadinejad had written to US President George Bush which helped ease trader concern on the standoff over Tehran's nuclear program.

"In this letter, he has given an analysis of the current world situation, of the root of existing problems and of new ways of getting out of the current vulnerable situation in the world," Iranian government spokesman Gholamhossein Elham said.

The letter is the first publicly announced personal communication from an Iranian premier to a US president since ties between the two countries were broken after the 1979 Islamic revolution.

The United States has led international action against Iran's nuclear plan, which it says is aimed at building atomic weapons. Tension over the program helped push US oil prices to record highs over $US75 a barrel last month.

Iran says it needs nuclear fuel for civilian use and has reacted defiantly to the possibility of any UN resolution demanding it halt its program. At the weekend, it reissued a threat to leave the nuclear Non-Proliferation Treaty.

Analysts were cautious over impact of the letter.

"The news from Iran is certainly bearish, at least immediately anyway. But the extent of how bearish it is going to be depends on the content of the letter, which no one knows as yet," said Tetsu Emori, the chief commodities strategist at Mitsui Bussan Futures.

The price of oil has risen over $US8 to date this year as investors worry the Iran dispute may eventually disrupt oil output from OPEC's second largest producer.

But the oil price has fallen $US5 from record highs touched two weeks ago after concerns about US gasoline supplies eased last week when motor fuel inventories rose.

A Reuters poll of analysts predicted weekly US government data released on Wednesday would show a 1.5 million barrel rise in gasoline stocks, and a 400,000 barrel draw in crude inventories for the week ending May 5.

Bullish Outlook

International Energy Agency director Claude Mandil said on Monday he expected oil prices to stay high for at least two to three years because of high global demand and tight supply.

"They (oil companies) have not invested enough for the last 20 years," Mandil said.

"This is a cyclical business. We had low prices in the 1990s, which was unfortunate for investment in future production. We now have accelerating investment, but that will not (see) results overnight," he told reporters in Australia.

Venezuela - the world's fifth-largest oil exporter - said it was seeking to boost royalties and income tax on four multi-billion dollar heavy oil projects that process some 620,000 barrels per day in the Orinoco Belt.

The announcement came less than a week after Bolivia rattled markets by sending troops into oil and gas fields in a surprise nationalization of the country's energy sector.