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Oil prices head lower as supply worries ease

WASHINGTON -- The price of oil sank to a two-month low yesterday, as supply concerns eased and traders bet the transfer of political power in Iraq would reduce attacks against the country's oil infrastructure.

But energy analysts were skeptical the transfer of sovereignty, from the US-led Coalition Provisional Authority to an interim Iraqi government, would quell opposition groups who view the nearly 140,000 US troops in Iraq as evidence of continuing occupation.

"Will the handover lead to a cessation of bombings on pipelines? You'd like to think so, but it's just too early in the game to think that everything's going to be OK," said Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington.

Ebel said speculators appear to have used the handover as a reason to hedge their bets, just in case the security situation in Iraq does improve.

Light crude for August delivery settled at $36.24 per barrel on the New York Mercantile Exchange, down $1.31, or 3.5 percent. July heating oil settled down 3.57 cents at 97.50 cents per gallon. July gasoline was down 6.09 cents at $1.14 per gallon. July natural gas was down 21.2 cents at $6.14 per 1,000 cubic feet.

In London, Brent crude futures fell $1.27 to $33.70 on the International Petroleum Exchange.

While the news out of Iraq helped to drive the price of Nymex oil to its lowest level since April 7, analysts said it was only a marginal factor and that a drop in prices was expected anyway yesterday for a variety of reasons:

Shell Exploration & Production Co. said repairs were completed and oil production resumed on a platform in the Gulf of Mexico that was shut down more than a month ago.

The president of Saudi Arabia's state oil company said the kingdom could make up for any shortfall linked to violence in neighboring Iraq.

Pressure was taken out of the market late last week after the resolution of a labor dispute in Norway, the world's third-largest oil exporter.

An Iraqi oil official said over the weekend the country's exports now hover between 1.7 million and 1.8 million barrels a day -- about the same level as before the war started in March 2003. That assessment came after repairs were completed on two oil pipelines in Southern Iraq that were damaged by saboteurs this month.

"You have a lot of good news out there," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. The earlier-than-expected political transfer in Iraq -- it was supposed to take place tomorrow -- just fed the momentum, Flynn said.

Still, there remains considerable nervousness in the market that terrorists might attack oil targets in Iraq, Saudi Arabia, and elsewhere in the Middle East. Analysts said there exists a "terror premium" of at least several dollars per barrel to the price of oil.

"The market will still be susceptible to things blowing up," said Jamal Qureschi, a market analyst at PFC Energy in Washington.

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