Prices spiked to two-month highs as the storm known as 'Claudette' headed towards the Gulf of Mexico, threatening the numerous refineries along the Texas and Louisiana coastlines. In the event, only a small proportion of production was shut in. However, the disproportionate impact on prices illustrates the potential effects of the storm season, during which precautionary closures are common, on an already tight market.

US gasoline demand continues to support prices. Refinery inputs climbed 71,000 barrels a day (b/d) to 15.6 million b/d in the week to 11 July, but gasoline stocks remain 3 per cent down on the corresponding point in 2002. Stocks of reformulated gasoline (RFG), which accounts for about one third of the US market, are particularly low, down 13.5 per cent year on year. Worries remain about the ability of Venezuela, a key RFG supplier, to restore exports to normal levels, which have still to recover following the crippling strike at the end of last year. Venezuela's June crude output averaged about 2.4 million b/d, more than 500,000 b/d below its 2.9 million-b/d OPEC quota.

US crude stocks continue to fall, sliding 3.6 million barrels to 278.6 million barrels in the second week of July, as refiners ramp up runs to meet peak driving season demand. High US gasoline prices are creating an incentive for refiners elsewhere to produce for the American market, which is in turn driving up crude prices. However, arbitrage is not yet sufficient to bring down US gasoline prices. The European market is also tight.

High prices prompted another warning from the International Energy Agency (IEA) to OPEC not to cut production ceilings at its 31 July meeting. The latest IEA monthly report, released on 11 July, predicts that low OECD stocks and the slow return of Iraqi exports to the market will keep prices within OPEC's $22-28-a- barrel target band for the remainder of 2003.

IEA output data for June contributed to the week's high prices, demonstrating that OPEC delivered on its April pledge to reduce output from June. However, Riyadh accounted for almost all the cutting, with Kuwait and the UAE the only other producers cutting voluntarily.

Iraq's recovery remains slow. Production in mid-July stood at about 800,000 b/d, well below the mid-June forecast of 1.5 million b/d. The export of 8 million barrels of crude from Mina al-Bakr, tendered in early July, was partly caused by damage to a pipeline linking the southern Rumaila field with a refinery to the north. When the pipeline is repaired, some output will be diverted back for domestic consumption.