Oil falls $1.19 on news of al-Zarqawi death

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Thursday, June 8, 2006

The price for a barrel of oil dropped after news broke that Al Qaeda's leader in Iraq Abu Musab al-Zarqawi had been killed in a US airstrike Thursday. The death of al-Zarqawi seems to have been interpreted by the market as good news for the future supply of oil from the region.

Short-Term Oil Prices, 2004-2006 (not adjusted for inflation).

This is against the backdrop in 2006 when the price of oil had reached a record high of $70 a barrel.

Today on the New York Mercantile Exchange light crude futures for July dropped from over $70 a barrel to a low of $69.54 before rising to $69.63 for a $1.19 loss. "There's less of a terror threat in Iraq now," said Naohiro Niimura, vice president of energy derivatives at Mizuho Corporate Bank Ltd, in Tokyo, who gave his reason for the fall.

Iraq lies over one-third of known oil reserves but since the Iraq war in 2003 has been unable to pump more than 2 million barrels a day - 1 million less than prior to the coalition invasion. In May exports were said to be 1.5 million bpd.

The line on a graph that plotted oil price had done a steady incline over recent years, though many factors are involved in the price of a barrel of oil so it is almost impossible to say how much the troubles in Iraq contributed to this rise.

Iraq's exports make up the largest proportion of its Gross Domestic Product and a significant proportion of world supply. Investors were said to have been worried about developing in the country citing lack of security and legal protection.

Al-Zarqawi, known for videotaped beheadings, suicide bombing campaigns against coalition forces and civilians and reportedly some attacks on oil infrastructure inside Iraq, had claimed responsibility for bombing three hotels in Amman, Jordan. It was hoped the death of Osama bin Laden's operative in Iraq would remove a man who had opposed the US-backed Shiite-led state and western influence in the wider-region.

The Iraqi Prime Minister Nouri Maliki's recent appointment of new security and home affairs ministers also may have affected the oil market. Director general of marketing and economics at the Iraqi oil ministry said both pieces of news together were "a positive indicator for security," said Shamkhi Faraj.

Other voices sounded a note of caution against the optimism: "The situation in Iraq has now become so chaotic, that it transcends the death of one man, influential as al-Zarqawi was," said Edward Meir.

The analyst at Man Financial believes the threat to the Iraqi oil industry is political as well as physical.

"Yes, al Qaeda attacked oil installations but they were not the only actors and they were not the main actors," he said. "There is also a new factor -- political parties that are using threats against oil to gain leverage."

In an announcement about oil, Thursday, Deputy Prime Minister Barham Salih of the Iraqi government said it hoped to produce 4.3 million bpd in four years.