Big drop puts oil under $65

Crude falls on expectations that OPEC will maintain high production levels, signs of healthy inventories and cooling tensions with Iran.
September 11 2006: 11:45 AM EDT

LONDON (Reuters) -- Oil dropped over $1 Monday, falling below $65 for the first time in nearly six months, as OPEC looked set to keep pumping at high rates to ensure world consumers were well-supplied despite a 20 percent fall in prices since mid-July.

The market was also pressured by Iran's offer to halt temporarily its atomic work, slowing economic growth, robust fuel stocks and a sluggish hurricane season."U.S. supply is comfortable and demand is about to enter a comparative lull. The Iran premium is dwindling too as the negotiations between Iran and the U.N. drag on," said Tobin Gorey of the Commonwealth Bank of Australia.

U.S. light crude for October delivery slid $1.30 to $64.95 a barrel on the New York Mercantile Exchange. The front month contract lost more than 4 percent last week, and the last time oil closed below $65 was March 27.

The Organization of the Petroleum Exporting Countries (OPEC) met Monday in Vienna, and is widely expected to keep current production limits unchanged at 28 million barrels per day.

For more than a year OPEC has been pumping at or near its fastest rate for 25 years. But forecasts that demand for OPEC oil will decline in 2007 are beginning to worry some in the group that pumps a third of the world's oil.

But Saudi Oil Minister Ali Al-Naimi, OPEC's most influential voice, said oil demand would remain healthy next year.

"Market fundamentals are very sound," he told reporters. "We are beginning to see a slight decrease in economic growth, very slight ... It is nothing alarming."

Some analysts predicted that prices have peaked.

"Although risks remain, we now think that the $80 peak we had called is indeed the peak and that the ebb of crude oil and refined products prices has started," said Morgan Stanley in a research note.

Bearish sentiment was exacerbated on cautious optimism over Iran's nuclear dispute with the West.

Iran's chief nuclear negotiator Ali Larijani offered a two-month suspension of Tehran's nuclear enrichment program in weekend talks with EU foreign policy chief Javier Solana, an EU diplomat said on Sunday.

But it was unclear if Iran would meet the Western demand that it suspend enrichment before the start of any talks on trade incentives aimed at ending the nuclear stand-off. An Iranian official denied Tehran had offered any freeze on enrichment.

"The market seems to be reacting to the cautiously positive outcome of Iran's meeting with the EU," said Mike Wittner of Calyon Bank.

"I don't think the OPEC meeting holds a whole lot of significance for the market today. It's really a bit of a footnote, as a rollover seems to be a done deal."