Oil prices drop below $125 on US demand fears

31 July 2008
Oil prices ended July by dropping by more than $2 a barrel as new economic data cast a further shadow over crude demand in the key US market.

The US Commerce Department reported a 1.9 per cent lift in second quarter gross domestic product compared with the 2.4 per cent increase expected by a poll of economists.

In late morning trading on 31 July, the price of West Texas Intermediate oil was $124.60 on the New York Mercantile Exchange, nearly $25 shy of the all-time record of $147.50 set on 11 July.

On 29 July, Opec president Chakib Khelil said markets are now balanced given the recent drop in prices and said prices could yet fall to between $70-80 in the long-term if the US dollar strengthened and geopolitical fears subsidised.

Elsewhere, Iraqi oil production hit its highest post war quarterly figure of 2.43 million barrels-a-day (b/d).

A report to the US Congress made by the Special Inspector General for Iraq Reconstruction (SIGIR) found production was aided by the absence of attacks on arterial crude pipelines in the first half of the year.

“Given that, the current output level, and the relatively narrow range of output over the past three quarters, does then seem to imply that 2.45 million b/d or so is pretty close to full sustainable capacity with current infrastructure,” investment bank Barclays Capital says.

However, the bank has doubts about oil majors being able to hike production to 3 million b/d over the short-term due to infrastructure concerns.

“While an output target of 3 million b/d has in recent years frequently been put forward by interested parties as a realisable short-term objective, the current state of infrastructure does not yet seem capable of sustaining production close to that level," the bank notes.

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