Crude Lower on Iran Comments

Rice says the U.S. would consider economic incentives of nuclear activities were scaled back.
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Updated from 2:35 p.m. EDT

Oil prices fell Wednesday as traders bet that gasoline stockpiles are growing and that OPEC will continue pumping record levels of crude. A U.S. offer to negotiate directly with Iran, the world's fourth-largest crude producer, was also driving down prices.

Light, sweet crude shed 74 cents to settle at a one-week low of $71.29 a barrel on Nymex. On Tuesday, the crude contract rose 66 cents to $72.03, its highest close in over two weeks.

Shares of oil drillers and service companies were ignoring the pullback and climbed around 2%. On Tuesday, energy shares suffered a sharp decline on rising crude prices.

In conjunction with its European allies, the U.S. is willing to explore economic incentives if Iran will reconsider a nuclear program that western nations worry is a prelude to weapons production, Secretary of State Condoleezza Rice said. The standoff over the nuclear program has contributed to high oil prices over the last three months.

As long as nuclear enrichment is occurring, however, the U.S. is unwilling to negotiate with Iran, Rice warned. "The president is not going to take any of his options off the table, temporarily or otherwise," she said in answer to a question about a military response.

The U.S. has thus far refused to participate in talks despite repeated requests from European diplomats.

Meanwhile, oil ministers from Qatar, Libya, Iran, Algeria and the United Arab Emirates on Wednesday said they would keep production at record levels, echoing a pledge from OPEC President Edmund Daukoro. OPEC, which accounts for 40% of the world's crude, meets on Thursday in Caracas. Since the middle of last year, OPEC member countries have been producing around 28 million barrels of crude per day.

Oil prices are sensitive to OPEC member comments because there is little spare production capacity around the world at present. Already, the world consumes more than 85 million barrels of crude per day, thanks to rising demand in India, China and the U.S. But with only 2 million barrels a day of extra supply, there is little to cover any spikes in demand.

Reduced output in Iraq and Nigeria, where rebels have attacked the country's petroleum infrastructure and driven down output by a quarter, and the possibility of cuts in Iran, the world's fourth-largest producer, have kept prices high. Facilities damaged in attacks may come back online in the next few weeks and boost Nigerian production by 160,000 barrels a day, said Edmund Daukoro, who is also Nigeria's oil minister.

Global supplies may become a little looser after the Baku-Tbilisi-Ceyhan pipeline officially opens in July. An initial shipment of 700,000 barrels will be loaded onto a

BP

(BP) - Get Report

tanker this Friday to test the system. The $4 billion pipeline, designed to carry 1 million barrels of crude, will move oil from the Caspian Sea and bypass Istanbul's crowded Bospurus strait.

Energy traders were also eying projections for the U.S. Energy Department's weekly survey of domestic petroleum stockpiles due out on Thursday at 10:30 a.m. EDT. The report is delayed a day this week because the federal government was shuttered on Monday for the Memorial Day holiday.

In a

Bloomberg

poll of analysts, inventories of gasoline and distillates were expected to increase by 1.5 million barrels each as refiners increased production and imports rose. Last week, refiners likely rose 0.80% to 90.5%.

With higher production of refined products comes lower supplies of crude, which probably fell by 1 million barrels to 342.9 million barrels. Inventories are nearly 4% higher than last year, but could be cut this summer if another round of hurricanes closes down the Gulf of Mexico's oil industry. A day before the hurricane season begins, around a quarter of the region's oil production remains offline.

Higher gasoline levels would help ease rising demand and concerns of a shortage in supplies. The peak summer driving season began on Monday and traders have been worried a slower recovery in refinery operations would crimp inventories.

This year, as refiners struggled to switch over to summer blends of gasoline and ethanol, supplies of gasoline dropped and prices spiked. They are currently 3% below last year. The average price for regular gasoline nationwide was $2.86 per gallon last week, according to the U.S. Energy Department.

Expectations of higher stockpiles were helping to drive down gasoline prices by 1 cent to $2.14 a gallon and heating oil by 4 cents to $1.96 a gallon. Both contracts for June delivery expire today and should inject some volatility into trading.

Warm weather predictions boosted natural gas prices by 26 cents to nearly a three-week high of $6.38 per million British thermal units. The National Weather Service expects above-average temperatures to bathe most of the country through June 13. When temperatures are high, demand for electricity to power air conditioners rises. Natural gas is used by utilities to generate power.

Higher demand for natural gas will inevitably draw down supplies, which stand 29% above a year ago and 49% over the five-year average. Analysts polled by

Bloomberg

expect inventories to climb by 86 million cubic feet from 2.1 trillion cubic feet last week in the Energy Department's weekly petroleum survey.

Meanwhile, the Amex Oil Index, Philadelphia Oil Service and the Amex Natural Gas Index were each increasing around 2%.

Kerr-McGee

(KMG)

,

Hess

(HES) - Get Report

,

Repsol

(REP)

and

Chevron

(CVX) - Get Report

were leading the advances among oil producers, posting a 2% rise.

Oil service companies

Global Industries

(GLBL)

,

BJ Services

(BJS)

, and

Rowan Companies

(RDC)

were adding 3%.

In the Amex Natural Gas Index,

Noble Energy

(NBL) - Get Report

,

Southwestern Energy

(SWN) - Get Report

and

EOG Resources

(EOG) - Get Report

were each climbing from 3% to 4%.