International Energy Agency (IEA) chief Claude Mandil on 2 July warned that such high prices were damaging global economic recovery and called on OPEC to increase output. 'The prices are too high for everybody - too high for the world economy - and that is one of the reasons the economy is sluggish and not recovering very well,' he told reporters in Vienna. 'It is not good for consuming countries and in the long run it is not good for OPEC countries either because they are losing market share.'

High prices are being driven chiefly by US demand as the peak driving season approaches. Tight refinery margins caused falling runs in the final week of June despite high import levels, preventing gasoline build-ups to normal levels for the time of year. 'Within a month the system has gone from trying to run at a dangerously fast rate to now producing too little for balance,' says JP Morgananalyst Paul Horsnell. 'Now the weather in the US has become better, gasoline demand will march upwards from this point.' Crude inventories fell again in the week to 27 June, down 2.1 million barrels to 282.1 barrels, 11.5 per cent lower than the corresponding point in 2002.

The effects on prices of tight US fundamentals are being compounded by supply uncertainties. Iraq has yet to resume regular exports, and the frequently revised target of 1 million-1.2 million barrels a day (b/d) of output by mid-to-late July remains optimistic. Current production is fluctuating between 700,000-800,000 b/d, and even if output is raised to the requisite levels, pipeline problems could further delay exports. North Oil Company (NOC) director Adel al-Kazaz warned in late June that urgent repairs were needed to the main crude pipeline from the Kirkuk fields to Turkey's Ceyhan export terminal. On 30 June, a fire caused by looters forced the closure of the southern export pipeline, highlighting the security problems that have plagued efforts to raise production.

Further uncertainty was added to the equation with the beginning of a general strike in Nigeria on 30 June, over fuel price hikes. Oil facilities have not yet been affected, but the oil workers union has threatened to shut down the industry if the strikers' demands have not been met by 7 July. 'In light of the continuing bad news from Iraq, Nigeria is just adding to the whole series of factors that will support prices this week,' says Horsnell.