Rise in global output drags oil prices lower

LONDON (AP) B World oil prices lost much of their speculative heat in May because of sluggish demand for crude and an easing of fears that strife in the Middle East might disrupt supplies, the International Energy Agency said Tuesday.

An increase in global output contributed to last month's fall in crude prices, making it less likely that OPEC would boost production later in the year.

Although oil traders seem to believe that geopolitical risks to supplies have receded, the International Energy Agency warned that this perception could crumble quickly given a flare-up in the Israeli- Palestinian conflict, the U.S.-led war on terrorism or a war between India and Pakistan.

Questions about the pace of a worldwide economic recovery and expectations that the market will tighten during the second half of the year have added to a sense of uncertainty, the agency said in its monthly oil report.

The Paris-based International Energy Agency is the watchdog for the Organization for Economic Cooperation and Development, a club of rich, oil-importing nations.

Global demand for oil is forecast to increase this year by a modest 0.6 percent to 76.5 million barrels a day, with middle-income and poor countries, including China, accounting for most of the growth. But the agency predicted that demand would pick up by 1.9 percent during the last quarter alone, due to a surge in autumn sales of heating oil in key importing nations.

Still, the agency has made significant revisions in earlier forecasts for demand, and Lawrence Eagles of London brokerage GNI Ltd. said further revisions could be expected this year.

"The real truth is it's going to be very hard to gauge demand in the second half of the year," said Eagles, GNI's head of commodity research.

A surge in oil output from Iraq helped swell global crude supplies in May by an average of 1.2 percent to 75.6 million barrels a day, the agency reported. Iraq resumed its shipments May 8 after ending a 30-day boycott directed at countries that support Israel in its conflict with the Palestinians.

Venezuela also pumped more oil last month, while Russia and Kazakhstan both set new, post-Soviet production records for crude.

Prices slipped as a result, after having strengthened earlier in the month. Front-month contracts of U.S. light, sweet crude slid by an average of $3.26 a barrel to $25.24 during the second half of May, the IEA said.

July contracts of light, sweet crude closed at $24.12, down 17 cents from Monday's close in New York.

U.S. gasoline prices have followed crude's lead. Gas fell nearly 2.5 cents a gallon to an average price of $1.44 per gallon during the three weeks ending Friday, according to a survey of 8,000 U.S. filling stations.

In spite of the current softness in energy markets, the International Energy Agency argued that the Organization of Petroleum Exporting Countries should consider boosting output later this year to avoid uncomfortably high prices in the autumn.

OPEC oil ministers have already ruled out increasing output for the third quarter when they meet for consultations on June 26, and the IEA is concerned that they might decide to stick with their current production quotas for the remainder of the year.

Supplies from Iraq remain unpredictable. Iraq's exports have plunged this month because Baghdad has struggled to find buyers willing to pay its illegal surcharges for crude.

However, the penchant many OPEC members have for cheating on their quotas could help offset any tightening in supplies later this year.

Saudi Arabia, Venezuela and Kuwait were among those OPEC countries that pumped well in excess of their agreed quotas last month, the International Energy Agency said.

"If OPEC indiscipline creeps up a little bit further, that will decrease the chance that an output hike would be needed in the third quarter of the year," Eagles said.

So too could an increase in output from non-OPEC producers, such as Russia and Norway, which have already said they would not stick with their production or export cuts beyond the end of June.

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