Oil Boom Profits

Natural gas futures surged 14 percent to a near six-month high on Monday, rallying on strong demand from power producers amid scorching temperatures across the Midwest and Northeast.

Oil prices also rose as fighting between Israel and Hezbollah raged on, keeping traders tense about a possible Mideast supply disruption.

The U.S. heat wave drove up demand for natural-gas-fired electricity as consumers cranked up their air conditioners. That sent September natural gas futures $1.027 higher on the New York Mercantile Exchange, where they settled at $8.211 per 1,000 cubic feet.

It was the highest settlement price for front-month natural gas futures since Feb. 3.

The upper Midwest and Plains were steamy, with numerous heat warnings in place from Michigan to Oklahoma. Forecasts for above-normal highs were posted along the East Coast, where triple-digit readings were in the offing by midweek from the Carolinas through southern New England.

Jim Owen, a spokesman for the Edison Electric Institute, a Washington-based trade group, said there was a "fairly significant strain" on the nation's power grid. Particularly vulnerable are the distribution lines, which heat up and sag as more juice flows through them, raising the risk of outages.

Owen said there are "some local exceptions" but that power generators and distributors appear to have enough capacity to meet demand.

Still, many utilities asked homeowners to conserve electricity by not setting their thermostats too low, and by postponing the use of major appliances until the off-peak evening hours.

The EEI said last week that the U.S. set a record for electricity demand for the week ending July 22. As a result, the Energy Department last week surprised the market by reporting that U.S. inventories of natural gas shrank by 7 billion cubic feet. Supplies typically build during summer.

Still, the country's natural gas inventory is well above historical levels at 2.76 trillion cubic feet. The five-year average for this time of year is 2.27 trillion cubic feet.

Analyst Dan Lippe of Houston-based Petral Worldwide believes that, barring any major hurricane damage to platforms and pipelines, natural gas prices could fall sharply in September. "You will see (U.S.) storage facilities full well before the last week of October," Lippe said.

Light sweet crude for September delivery rose $1.06 to $74.30 on the New York Mercantile Exchange. September Brent crude futures at London's ICE Futures exchange rose 66 cents to $74.05 a barrel.

Oil prices have been choppy in recent weeks, but BNP Paribas Commodity Futures broker Ric Navy said the market could be setting up for a big move.

"The longer you go sideways, the bigger the breakout when it occurs," Navy said. "And at this point, the long-term trend is still higher."

Navy said traders could easily become more anxious in the weeks ahead, with the Gulf of Mexico hurricane season expected to pick up and the nuclear standoff between the West and Iran expected to come to a head in late August.

The U.N. Security Council passed a resolution Monday giving Iran until Aug. 31 to suspend uranium enrichment or face the threat of economic and diplomatic sanctions. Iran immediately rejected the council's demands, which were watered down from earlier drafts because of Russian and Chinese demands.

Oil traders have been focused for nearly three weeks on the violence between Israel and Hezbollah guerrillas in Lebanon, fearful of possible supply interruptions in the region. Iran, OPEC's No. 2 supplier, is a backer of Hezbollah.

An Israeli airstrike Sunday killed at least 56 Lebanese, mostly women and children, when it leveled a building where they had taken shelter. Israel agreed to a 48-hour suspension of aerial activity over southern Lebanon afterward, but the brief respite ended when Israeli planes hit targets in southern Lebanon on Monday after Hezbollah guerrillas blasted an Israeli tank and injured three soldiers.

More than 500 Lebanese and 50 Israelis have been killed since the fighting broke out on July 12.

Sunday's attack prompted U.S. Secretary of State Condoleezza Rice to cut short her Mideast diplomatic mission. Lebanese Prime Minister Fuad Saniora demanded a cease-fire and said talk of a larger peace package must wait until the firing stops.

Paul Harris, head of energy at Bank of Ireland Global Markets in Dublin, said Brent crude prices would likely move on developments in the Israel-Lebanon conflict and would respond to any progress in diplomatic efforts to end the violence.

In other Nymex trading, gasoline futures dropped more than a cent to $2.22 per gallon and heating oil futures were up 2.67 cents to settle at $1.9679 per gallon.

Natural gas rallied to its second biggest gain this year as record-breaking heat moved from the Midwest to the Northeast, spurring utilities to increase electric

U.S. temperatures are soaring this week from Minneapolis to Boston. Power generators burn more of the fuel in gas-fired units during hot weather as people turn up air conditioners. Above- average temperatures will cover most of the eastern half of the U.S. through the first week of August, forecasters said.

``We're having real hot weather in the Northeast this week,'' said Stephen Briggs, managing partner at Intermarket Management LLC in Verona, New Jersey. Gas is going to test $8 per million British thermal units, he said. ``You've got to be real cautious if you want to sell it now.''

Gas for September delivery rose 59.6 cents, or 8.3 percent, to $7.78 per million British thermal units as of 10:28 a.m. on the New York Mercantile Exchange. The price gained as much as 11 percent earlier, the second-largest increase this year on a percentage basis. It climbed 12 percent Jan. 30. Gas has rallied for eight days in nine, and has surged 41 percent since July 18.

A mass of hot air that smothered the West Coast last week, leaving more than 100 people dead in California, moved into the Midwest this weekend. That weather will hit the Northeast by tomorrow, delivering near-record heat in many areas.

Heat Warnings

Excessive heat warnings or heat advisories were in place today for much of the Midwest and Plains states, including Minneapolis, Chicago and St. Louis.

A heat advisory was in effect for Minneapolis, where the high will touch 100 degrees Fahrenheit (38 Celsius) today, with a heat index rating of 109, the National Weather Service said. Heat index is a measure of the combined effect of temperature and humidity.

Peak readings in St. Louis will get to 102 today, 101 tomorrow and 99 on Aug. 2, National Weather Service forecasters said. Record highs are 104, 105 and 104 for the three dates, from 1980, 1901 and 1964, respectively.

Excessive heat warnings were in effect for Chicago, where highs were projected to reach 99 degrees today and tomorrow. Boston will reach 99 on Aug. 2, surpassing the seasonal norm of 82 and falling shy of the 1975 102-degree record.

Temperatures in New York City will peak at 95 tomorrow and 99 on Aug. 2. The record is 100 for both days, from 1933 and 1955, respectively.

Higher-than-average temperatures were expected to stretch from the Plains to the Atlantic coast from Aug. 5 through 9, according to the latest outlook from the U.S. Climate Prediction Center.

Summer Withdrawal

Record heat the past two weeks has limited the availability of gas to add to storage, trimming a surplus versus historical averages.

Utilities and manufacturers made their first-ever summertime withdrawal from underground caverns in the week ended July 21, the Energy Department reported last week. Stockpiles fell by 7 billion cubic feet. Summer is when storage is typically built up to supplement pipeline supplies during winter.

Inventories have never recorded a weekly drop during the months of May through September since the government began tracking gas-supply fluctuations in 1994.

The inventory drop took U.S. stockpiles to 2.756 trillion cubic feet, 22 percent higher than the average for the past five years. They had been 26 percent higher in the prior week. Analysts surveyed by Bloomberg had expected a gain of 24 billion, based on a median of 22 replies.

The five-year average supply surplus stood at 63 percent in early April and 46 percent in late May.

Oil prices slipped below $73 a barrel on Monday as hopes grew for a ceasefire in the Middle East and Nigerian output looked set to improve after attackers vacated a flow station.

U.S. crude for September delivery fell 32 cents to $72.91 a barrel by 0814 GMT, dipping as low as $72.88 after a $1.30 fall on Friday, partly due to data showing that U.S. economic growth had slowed to 2.5 percent in the second quarter.

London ICE Brent crude lost 28 cents to $73.11.

Dealers took profits on Friday amid apparently brighter prospects for a truce in the Middle East that would end a 20-day war traders fear might draw in neighboring oil producers like Syria or Iran, both supporters of the Hizbollah guerrillas.

Sunday's Israeli air strike on the southern village of Qana that killed at least 54 Lebanese civilians, including 37 children, has intensified world pressure for an immediate halt to the fighting and fueled more anger across the Arab world.

On Monday U.S. Secretary of State Condoleezza Rice, who aborted a planned trip to Beirut after the bombing, said a ceasefire could be forged this week.

"This morning, as I head back to Washington, I take with me an emerging consensus on what is necessary for both an urgent ceasefire and lasting settlement. I am convinced we can achieve both this week," she told reporters in Jerusalem.

World leaders deplored the attack on Lebanon.

Israel has suspended its aerial bombardment of southern Lebanon for 48 hours to allow for an investigation into the attack and will co-ordinate with the United Nations to allow a 24-hour window for residents to leave the area if they wish.

NIGERIA RETURNING

Prospects for a recovery in Nigerian production grew on Monday after the police commissioner of Bayelsa state said attackers have vacated an Agip oil flow station and released all hostages they were holding there.

A spokesman for Agip declined to comment and there was no word on when operations at the Ogbainbiri flow station might resume. Agip's parent company, Italy's Eni, said the attack last Tuesday had caused a "significant decrease" in output.

Output in the world's eighth-biggest exporter has been cut by more than one-quarter due to militants attacks.

Royal Dutch Shell , the country's biggest foreign producer and most heavily affected, said it did not expect a significant recovery in output before the end of the year.

Supplies also appeared set to improve from Iraq after repairs to its oil pipeline to Turkey, Oil Minister Hussain al-Shahristani said at the weekend. A senior ministry source said the flow, shut off since a new bout of sabotage on July 9, should start in a few days.

The latest demand signals from leading consumers added to the market's downbeat sentiment, with the U.S. economy growing in the second quarter at less than half the 5.6 percent rate registered in the first quarter, raising fears of lower oil demand growth.

In Japan, the world's third-largest oil user, fuel sales slumped 7.1 percent in June from a year ago as poor weather and higher pump prices cut seasonal gasoline demand.

Intense summer heat and climbing oil prices could boost the shares of small gas and oil companies including Range Resources Corp. (RRC) and Denbury Resources Inc. (DNR), Barron's financial newspaper reported on Sunday.

According to Barron's, Peter Vig, a hedge-fund manager who runs Dallas-based RoundRock Capital, is "unreservedly bullish on oil stocks," because "most of them still don't reflect the sorry probability that higher oil prices are here to stay."

Barron's said Vig likes Plano, Texas,-based Denbury Resources, which it said is unique because Denbury owns the biggest reserves of carbon dioxide used in oil recovery east of the Mississippi River.

In its liquid form carbon dioxide is used to extract oil that can not be recovered by traditional drilling means. Called "tertiary recovery," Barron's said getting oil with carbon dioxide is "low-risk and predictable" because the amount of oil recovered correlates with the amount of carbon dioxide injected.

Denbury's production is projected to grow, on average, 13 percent a year, nearly doubling over the next five years, Barron's said.

HOT OIL, COOLING GAS

In contrast, the outlook for gas shares -- which have risen over the past few days because of high temperatures across much of the United States -- is more cautious, Barron's cited Vig as arguing, because once the heat wave cools off, gas storage will begin to build again as demand for electricity drops.

Last week, a small dip in inventories surprised the market, Barron's said.

But Vig remains bullish on Range Resources, Barron's said, because of its "huge inventory of low-risk prospects, its super-lean finding costs and its briskly rising production."

The company has proved reserves of 1.6 trillion cubic feet with an average life of 15 years, Barron's said, adding that more than 80 percent of the reserves are gas, and only two-thirds is developed.

Denbury, which according to Reuters Data has a price-to-earnings multiple of 21.8, closed on Friday at $32.65, down a penny. Range, which trades at a multiple of 20.6, closed at $26.75, up 1.7 percent.

Strangers from the heartland, two businessmen share the hope that the energy resting beneath the deep blue waters of the central Gulf of Mexico might bring relief from high natural gas prices.


So, they wonder, why isn't it being pumped?

The Senate was expected to vote Monday on whether to expand oil and gas drilling to 8.3 million acres of Gulf waters off-limits to energy development for a quarter-century. The House has passed a broader bill dealing with offshore drilling.

Watching the developments closely are Tony Raimondo, owner of a metal fabricating company in Columbus, Neb., and Jay Bender, who runs a plastics plant in Brookings, S.D.

While they do not know each other, they have a common problem. Natural gas prices have soared and their companies are feeling the pain. These men believe the answer is more production, including in the restricted coastal waters.

"We're the only industrialized country that is not actively pursuing more natural gas resources. It makes no sense to me," Bender said in a telephone interview.

Bender, Raimondo and hundreds of business owners, in letters to members of Congress, have urged an end to the freeze that has barred oil and gas drilling off 85 percent of the country's coast. Lobbying powerhouses such as the Washington-based National Association of Manufacturers, U.S. Chamber of Commerce and National Chemistry Council have led the drive.

For the first time in a decade, Bender says, he has been forced to raise the price of the plastic components his plant molds into parts for such things as electronic scoreboards, medical equipment and printer cartridges. The cost of the raw plastic pellets has doubled in the past two years because those pellets are made of natural gas and oil.

Heating the warehouses by gas, Bender says, "costs two or three times what it did three years ago."

At his four metal fabricating plants, Raimondo's annual cost for natural gas has gone from $530,000 in 2000 to nearly $1.3 million _ an expense that is hurting his business.

Costing about $2 per thousand cubic feet only a few years ago, natural gas soared to as high as $15 late last year. This spring and summer it retreated to below $6, but has risen in the past month because of greater demand for air conditioning brought on by the intense heat across the United States.

The natural gas bill for chemical companies has jumped from $7.5 billion in 1999 to $30 billion last year, and some companies are expanding overseas where gas is cheaper, says Jack Gerard, president of the American Chemistry Council, the industry trade group.

Other energy-intensive business sectors including forest and paper, pesticide, aluminum and makers of carpets, bedding and furniture are being hit hard, he says.

The U.S. uses about 22 trillion cubic feet a year for everything from making plastics and fertilizer to producing electricity and heating homes. Supplies have struggled to keep up with demand.

Large amounts of gas are beneath offshore waters. But for 25 years lawmakers have feared tampering with the freeze on oil and gas drilling that Congress has put in place every year, covering 85 percent of the country's coastal waters _ almost everywhere outside the western Gulf of Mexico.

That may soon change.

Senators planned to vote on whether to expand oil and gas development in the east-central Gulf, opening up 8.3 million acres for drilling.

Last month, the House approved an even broader measure that would lift the quarter-century drilling freeze in Pacific and Atlantic coastal waters, although states could prohibit drilling if they choose to do so.

"In a nutshell, this bill is good for the people who are burdened with high cost of natural gas, the high cost of oil. It is their property. We ought to develop it and do it now," says Sen. Pete Domenici, R-N.M., the Senate bill's main sponsor.

Many environmentalists _ as well as senators from coastal states such as New Jersey, California and Florida _ fear the drilling will raise the risk of oil spills, and threaten fragile ecosystems and tourism.

David Alberswerth of the Wilderness Society says the question people "should be asking is why is the oil and gas industry sitting on large amounts of unproduced federal natural gas that they have leased already."

The Senate bill is limited to an area of the central Gulf that is 125 to 300 miles off Florida's coast. The plan has gained momentum with bipartisan support.

Largely at the insistence of Sen. Mary Landrieu, D-La., it sharply would increase the amount of federal royalties given to the four Gulf states _ Alabama, Mississippi, Louisiana and Texas _ that have drilling rigs off their shores.

Democrats, who once had threatened a filibuster fight over the bill, have backed off, wanting to give Landrieu a political victory that could prove important in her re-election bid in 2008 when Democrats hope to regain their majority in the Senate.

But many senators from coastal states worry about the push to open broader areas of the Outer Continental Shelf to energy development and pledge to block the broader House bill.

Senate Majority Leader Bill Frist, R-Tenn., said the Senate version was "a carefully crafted compromise" not to be tampered with. Sen. Harry Reid of Nevada, the Democratic leader, warned that if the House insists on broadening the measure, he will produce the votes needed to kill it.

A Texas oil firm is suing Gazprom, the Kremlin-controlled gas monopoly, over ownership of a giant gas field in Russia.

Privately-owned Moncrief Oil International claimed that it agreed to pay Gazprom $800m (£431m) in 1998 to acquire a 40 per cent stake in the Yuzhno Ruskoye (YR) gas field, which has been identified as a major source of gas for the European Union in future.

The deal was never completed and Moncrief claims that the Russian firm is in breach of contract. Gazprom denies this and is expected to fight the US court action.

News of the claim comes as Gazprom is attempting to diversify its international business, with several investments in the European downstream industry. The Russian company - rumoured to be planning a bid for Britain's Centrica - is also helping to build a major pipeline connecting Russia with Germany under the Baltic Sea. Much of the gas supplying this $5bn pipeline is intended to come from the YR field.

'Gazprom is actively pursuing business in the international market and must, therefore, act according to international standards,' said Richard Moncrief, chairman of the Texan oil firm. 'It is imperative that US courts protect the interests of US companies.'

Moncrief claims it was brought in to help develop the YR field and assured as recently as last year that the transaction would take place. But earlier this year Gazprom completed agreements with the German companies BASF and E.ON, which Moncrief says violate its own deal. Moncrief initially faced a legal setback when a US court said it had no jurisdiction to hear the case, but last week it filed an appeal against this ruling. The company is also suing BASF and E.ON.

Shell Canada Ltd. aims to expand its Alberta oil sands operation despite surging capital costs, and has given its partners 90 days to respond to its proposal, it said on Friday.

The cost of boosting output from the Athabasca oil sands project by 100,000 barrels a day has been estimated at more than C$11 billion ($9.7 billion), up 50 percent from estimates last year.

"Although the capital intensity of the project, estimated at between C$275 and C$350 per annual flowing barrel, has increased significantly from earlier estimates, Expansion 1 remains viable under a wide range of pricing scenarios," it said in a statement.

($1=$1.13 Canadian)

Oil prices fell more than a dollar on Friday as the United States and Britain sped up diplomacy for a U.N. resolution aimed at halting a 17-day war between Israel and Lebanese Hizbollah guerrillas.

The move eased fears that the conflict would spread to major oil producing countries in the region, a concern that had pushed crude oil prices to a record over $78 a barrel earlier this month.

U.S. crude futures fell $1.30 to $73.24 a barrel while London Brent crude fell $1.62 to $73.39.

President George W. Bush told a news conference after talks with British Prime Minister Tony Blair that Secretary of State Condoleezza Rice would return to the Middle East Saturday for talks on a United Nations resolution to end the fighting.

"We share the same urgency to stop the violence," said Bush, with Blair at his side.

The energy market was also hit by a report showing weaker-than-expected economic growth in the United States during the second quarter, raising expectations that the world's biggest oil consumer may slow its energy demand.

Economic growth in the United States slowed abruptly during the second quarter to a 2.5 percent annualized rate in the April-June quarter. That was less than half the robust 5.6 percent rate registered in the first quarter.

Oil dealers added that a big sell-off in gasoline futures on the U.S. market was also pressuring crude. Gasoline futures fell 7.10 cents to $2.2250 a gallon.

"There was a huge speculative sell-off in gasoline, which pressured crude," said Jim Ritterbusch of Ritterbusch and Associates. "The feeling is we're through the worst of the driving season in good shape."

BRENT OUTPACES U.S. CRUDE

Brent, which traditionally trades at a discount to U.S. crude maintained a slight premium, which analysts said was at least in part because Brent is seen as a more direct substitute than U.S. oil to disrupted Nigerian supplies.

"Brent is a direct competitor to Nigerian crude. They are very similar grades," said Deborah White of SG CIB in Paris. "And U.S. crude stocks are more than adequate."

Oil major Royal Dutch Shell's Chief Executive Jeroen van der Veer said the company did not expect production closed off in Nigeria to make a significant recovery this year.

Shell is losing 653,000 barrels per day (bpd) of the output it operates in Nigeria, most of it because of militant attacks.

Chevron has also reduced exports by 43,000 bpd.

The total amounts to around a quarter of production from the world's eighth biggest exporter.

Oil fell more than a dollar to less than $74 a barrel on Friday, unraveling gains driven by worries about a prolonged cut in Nigerian oil output and violence in the Middle East.

London Brent crude fell $1.51 to $73.50 a barrel and U.S. light sweet crude dropped $1.24 to $73.30 a barrel by 1423 GMT.

Oil major Royal Dutch Shell's Chief Executive Jeroen van der Veer said on Thursday the company did not expect production closed off in Nigeria to make a significant recovery this year.

Shell is losing 653,000 barrels per day (bpd) of the output it operates in Nigeria, most of it because of militant attacks.

Chevron has also reduced exports by 43,000 bpd.

The total amounts to around a quarter of production from the world's eighth biggest exporter.

Profit-taking followed a rise of more than a dollar on Thursday for Brent, which had reacted more strongly than U.S. crude to the concern about Nigeria.

Traders said there was no fresh news behind Friday's sell-off, although weak U.S. GDP data added fuel to bearish sentiment.

"Brent is a direct competitor to Nigerian crude. They are very similar grades," said Deborah White of SG CIB in Paris. "And U.S. crude stocks are more than adequate."

"Nigeria will probably see more disruptions before it gets better because of elections next year," said Craig Pennington of Schroders.

MIDDLE EAST UNDERPINS MARKET

Traders and analysts said that over the past days Nigeria has been a bigger factor for the market than violence in Lebanon, although nagging fears the conflict could draw in some Middle East oil producers have kept the market on edge.

Israel battered Lebanon on Friday, killing 11 people.

Calls have mounted across the world for an end to the war, but U.S. Secretary of State Condoleezza Rice delayed a possible return to the region, suggesting negotiations had not reached a point where she could produce a halt to hostilities.

"She will go when it is the right time," a U.S. official said. "She will go when it is useful."

Oil prices have also been drawing support from strong U.S. gasoline demand, which is 1.8 percent higher than a year ago, despite pump prices of around $3 a gallon in the world's top oil user.

More bearishly, figures released by the U.S. Commerce Department on Friday showed U.S. economic growth had slowed abruptly during the second quarter to a 2.5 percent annualised rate in the April-June quarter, less than half the robust 5.6 percent rate registered in the first quarter.

Slower consumer spending, especially on costly durable goods like new cars, was a key reason.

The second biggest oil consumer China posted surprisingly strong double-digit demand growth in the second quarter, but slowing imports of fuel oil and a trickle of diesel exports could signal more modest increases in coming months, traders said.
In the third largest oil user Japan, where demand has been unusually weak this summer as colder and wetter weather deterred holiday drivers, refiners were set to crank up runs in August after gasoline stocks fell to their lowest in almost two years.

The U.S. economy would not necessarily go into recession with oil at $100 a barrel but consumers would feel the pain and the economy would slow further, Standard & Poor's said on Thursday.

Analysts at the New York-based ratings and financial research company emphasized they are not forecasting oil at $100 a barrel, but the steady rise in crude prices over the last three years and the fear of potential supply disruptions has created the situation where it is at least imaginable.

"The good news today is that we feel even a $100 price would not result in a U.S. recession," said David Wyss, S&P's chief economist. But "the U.S. is more vulnerable today than it was a couple of years ago because the economy is slowing down."

U.S. crude oil for September delivery was trading near $74.50 on the New York Mercantile Exchange early Thursday afternoon.

Wyss already forecasts a drop in U.S. economic growth to 2.5 percent in 2007 from 3.5 percent in 2005 and 2006.

Higher oil prices would shave at least another 1 percent off the 2007 forecast, Wyss said.

That would leave the Federal Reserve facing the dilemma of both slowing growth and evidence of inflation as rising oil prices fed through the economy.

All it would take is a major hurricane, an attack on a production or loading facility, or political or military action that prompts a large producer such as Iran to stop production to push oil prices higher, S&P said.

INDUSTRY IMPACTED

Some industries would be more affected than others.

The oil industry should do better with higher oil prices unless there was a large drop in overall demand.

Automakers would be harder hit. Oil at $100 can only be considered a negative for the U.S. automakers as well as their suppliers, said Bob Schulz, S&P's automotive analyst, as a weakening consumer would prompt an aggregate drop in demand across the industry.

It would also impact automakers' credit risk as they tried to increase profitability and regain market share.

Airlines, where fuel accounts for one-third of operating costs, would have to rely on raising prices to offset higher energy prices, said Philio Baggaley, transportation and airline analyst. That would be problematic at a time of less demand in line with an overall slowing economy.

"The airlines would be caught in a squeeze, with costs going up and passenger demand faltering in a slowing economy," Baggaley said.

Ground transport companies would be in a better position as they could pass on higher costs as surcharges, something railroads have done successfully in recent years.

Chemical companies could also remain reasonably immune to higher oil as long as supply and demand factors enabled producers to pass costs onto customers through price increases, the firm said. But should demand fall in line with an overall economic slowdown the industry would not escape a cyclical downturn.

The bigger question is how long the consumer will keep spending.

S&P said that while consumer spending has held up reasonably well despite the rise in energy prices and interest rates of recent years, fuel costs are making an impact on spending because higher gasoline prices are no longer viewed as temporary.

Among retailers, discounters and fast food restaurants are likely to be hardest hit with crude prices at $100 a barrel because they cater to lower-income earners, the firm said.

Oil prices rose today as Shell said militant attacks and a pipeline leak in Nigeria may prevent it from meeting its production obligations for July and August. Traders also kept an eye on Middle East developments.


Shell Petroleum Development Co., a subsidiary of Royal Dutch Shell PLC, said a leak on the pipeline carrying 180,000 barrels per day had been a major factor in the declaration of force majeure — which excuses a party from performing its obligations under a contract.

Light, sweet crude for September delivery rose 65 cents to $74.59 a barrel in electronic trading on the New York Mercantile Exchange. September Brent on London's ICE Futures exchange gained 40 cents to $74.40 a barrel.

In other Nymex trading, gasoline futures rose less than half a cent to S$2.3000 a gallon and natural gas futures were up 21 cents to $7.100 per 1,000 cubic feet. Heating oil futures rose more than 2 cents to $1.9845 a gallon.

Nigeria's volatile Niger Delta region has been the scene of frequent disputes between oil companies and communities who have for years demanded a greater share of the wealth of Africa's largest crude producer.

Italian oil and gas company Eni SpA said earlier this week that attackers raided an oil flow station in the southern delta, causing a significant drop in the amount of oil treated by the plant.

Traders have also been watching this week to see whether the violence in Israel and Lebanon would affect other countries in the oil-rich Middle East. The conflict has killed hundreds in Lebanon and dozens in Israel.

Israeli jets pounded Lebanon today, extending their air campaign a day after Israel suffered its highest one-day casualty toll in fighting with Hezbollah, with nine soldiers killed. Al-Qaida also threatened new attacks in response to Israel's assault on Lebanon, its first comment on the fighting now in its third week.

Oil prices hit a record $78.40 high on July 14, two days after fighting broke out between Israel and Hezbollah militants in Lebanon, on fears that the violence would escalate into a regional war and disrupt supplies, particularly from Iran, the Organization of Petroleum Exporting Countries' No. 2 supplier and a backer of Hezbollah.

Adding to this are latest figures on robust U.S. oil market fundamentals.

In its weekly petroleum report Wednesday, the U.S. Energy Department said summer gasoline demand in the U.S. was almost 2 percent higher than last year despite $3-a-gallon pump prices — high by American standards.

Gasoline inventories fell last week by 3.2 million barrels to 211 million barrels, just 500,000 barrels more than last year. Over the past four weeks, average U.S. gasoline demand was 9.6 million barrels a day, or 1.8 percent higher than last year.

The agency said crude oil inventories were flat last week at 335.5 million barrels, or 12.4 million barrels above last year.

Oil prices continued the slight fluctuation the market has seen all week, dropping 15 cents in Thursday morning trading as traders continued to watch Middle East developments.


Light sweet crude for September delivery was at $73.79 in midmorning Asian electronic trading on the New York Mercantile Exchange, after closing slightly higher after U.S. government data showed a large drop in gasoline supplies and no letdown was seen in Israeli-Hezbollah fighting.

Prices have bounced up and down all week as traders watched to see whether the violence would affect other countries in the oil-rich market. The conflict has killed hundreds in Lebanon and dozens in Israel.

In other Nymex trading Thursday, gasoline futures rose 1.62 cents to $2.2800 a gallon and natural gas futures were up 11.3 cents to $7.000 per 1,000 cubic feet. Heating oil futures fell slightly to $1.9540 a gallon.

In its weekly petroleum report Wednesday, the U.S. Energy Department said summer gasoline demand in the U.S. was almost 2 percent higher than last year despite $3-a-gallon pump prices. Gasoline inventories fell last week by 3.2 million barrels to 211 million barrels, just 500,000 barrels more than last year. Average U.S. refinery output declined, with nationwide gasoline production averaging just 9.1 million barrels per day.

Over the past four weeks, average U.S. gasoline demand was 9.6 million barrels a day, or 1.8 percent higher than last year.

The agency said crude oil inventories were flat last week at 335.5 million barrels, or 12.4 million barrels above last year. Meanwhile, the supply of distillate, which includes diesel and heating oil grew by 800,000 barrels to 131.9 million barrels, or 4.6 million barrels more than a year ago.

Italian oil and gas company Eni SPA said attackers raided an oil flow station in Nigeria's southern delta that is operated by its Agip subsidiary, causing a significant drop in the amount oil treated by the plant. Eni did not give specifics on how much production had been shut off.

Agip pumps about 200,000 barrels of oil per day in Nigeria, which usually produces about 2.5 million barrels daily as Africa's largest oil exporter and the fifth-largest supplier of crude to the U.S.

Attacks by militants who say they want a greater share of oil wealth on behalf of the delta's inhabitants have decreased production by more than 20 percent.

Oil prices hit a record $78.40 high on July 14, two days after fighting broke out between Israel and Hezbollah militants in Lebanon, on fears that the violence would escalate into a regional war and disrupt supplies, particularly from Iran, the Organization of Petroleum Exporting Countries' No. 2 supplier and a backer of Hezbollah.

Crude oil rose Wednesday to $73.94 per barrel on the New York Mercantile Exchange.

The 19-cent gain was accompanied by a 48-cent increase in the price of natural gas, which climbed to $6.86 per million Btu.

Heating oil picked up 3 cents to $1.97 per gallon, and gasoline gained a penny to settle at $2.295 per gallon.

Early Wednesday, AAA said the average U.S. retail price of gasoline hit $3 per gallon.

Marathon Oil Corp. (NYSE Stock Symbol MRO) on Wednesday said it has accelerated its $2 billion common stock buyback program.

As a result, the company plans to buy back about $1.5 billion of its common stock by Dec. 31, with the balance being repurchased in 2007.

Through June 30, about 7.3 million shares were repurchased for about $554 million, the oil and gas explorer said in a news release.

Oil held near $74 today as world diplomats called for an urgent, sustainable ceasefire between between Israel and Hizbollah guerrillas in Lebanon. An attack on a Nigerian oil plant further cut output and earlier nudged up prices.

US crude rose 10 cents to $73,85 a barrel by afternoon trade.

Brent crude was up 36 cents at $73,64 a barrel. Both contracts lost over a dollar yesterday.

Foreign ministers from the US, the Middle East and Europe agreed at a meeting in Rome on the need for an urgent ceasefire and for an international force under United Nations mandate to secure the border between Lebanon and Israel.

UN Secretary-General Kofi Annan said that it was important to include both Iran and Syria to reach an agreement to end fighting, while US Secretary of State Condoleezza Rice voiced "concern" about Iran’s role in Lebanon.

Oil hit a record-high of $78,40 a barrel almost two weeks ago as fighting erupted.

Consumers are worried that the war could spread and endanger exports and shipping from the region that supplies almost a third of the world’s oil. But the price has since fallen nearly $5.

"We think for the moment that we’ve probably seen the worse we’re going to see in terms of an oil price response to the conflict," said Katherine Spector, global head of energy strategy at JP Morgan.

Second-quarter profit at Canadian Oil Sands Trust , the Syncrude Canada oil sands venture's biggest interest holder, jumped 54 percent on higher production and surging prices, it said on Tuesday.

Canadian Oil Sands, which looks set to buy junior gas producer Canada Southern Petroleum Ltd. for C$224 million ($198 million) following a bidding war, earned C$337 million, or 72 Canadian cents a trust unit, up from year-earlier C$219 million, or 48 Canadian cents a unit.

Excluding one-time items, the trust earned C$259 million, or 56 Canadian cents a unit, up 11 percent from C$233 million, or 51 Canadian cents in the year earlier quarter.

That beat an average estimate of 34 Canadian cents a unit among analysts polled by Reuters Estimates.

Funds from operations, the money trusts use to pay distributions to their unit holders, rose 14 percent to C$324 million, or 70 Canadian cents a unit, from C$284 million, or 62 Canadian cents, in the second quarter of 2005.

Canadian Oil Sands has a 35 percent stake in Syncrude, which is now restarting new equipment following its C$8.4 billion expansion, a move that was delayed earlier by mechanical problems.

The trust said it reduced its full-year mid-point outlook for Syncrude production to 90 million barrels from 95 million due to the delay in restarting the newly expanded equipment.

Its funds from operations for the year are now pegged at C$1 billion, or C$2.22 per unit.

Second-quarter results were helped by higher prices for Syncrude's synthetic crude oil and higher production from the project.

Production net to its share of Syncrude averaged 86,000 barrels a day in the quarter, up 7.5 percent.

The trust units rose 89 Canadian cents to C$33.85 on the Toronto Stock Exchange.

($1=$1.14 Canadian)

BP Plc, Europe's biggest oil company, reported a 30 percent jump in second-quarter profit to a record as crude prices surged and refining earnings increased.

Net income rose to $7.27 billion, or 35.6 cents a share, from $5.6 billion, or 25.9 cents, a year earlier, the London-based company said today in a statement. Revenue climbed 24 percent to $72.4 billion.

Chief Executive Officer John Browne today said he will boost 2006 capital spending by as much as $1 billion to $16 billion to raise production and gain ground on bigger rival Exxon Mobil Corp., which plans to spend $20 billion. His target to increase output 4 percent a year is being tested by a yearlong delay in the start of the Thunder Horse platform in the Gulf of Mexico.

BP is ``struggling to capture the benefits of the stronger oil price background,'' said Ivor Pether, who helps manage about $12 billion at Royal London Asset Management, including BP shares. The shares are ``dull'' today partly because the profit gains ``are not down to exceptionally good performance'' from the company's units.

Shares of BP slipped 0.1 percent to 633 pence as of 3:32 p.m. in London, valuing the company at 125.9 billion pounds ($232 billion). BP said the start of its $1 billion Thunder Horse platform would be delayed until next year. It was initially forecast to start late 2005.

Output Decline

BP shares have added 2.3 percent this year, less than a 17 percent increase by Exxon Mobil and a 4.5 percent gain in Royal Dutch Shell Plc's stock.

Second-quarter oil and gas output fell 2.3 percent from a year earlier, the fourth consecutive decline in production, BP said today.

BP's 17.6 billion barrels of oil and gas reserves are valued at $13.21 each, according to data compiled by Bloomberg. That's less than for Exxon Mobil, whose 21.6 billion barrels are valued on the stock exchange at $18.27 each.

Browne, 58, said he plans to retire when he reaches 60 in 2008 and hand over to one of several candidates.

``There are more than three,'' he said in an interview today in London.

Chairman Peter Sutherland asked Browne to make clear he will retire in 18 months, the Financial Times said today, citing an unidentified person close to the board. Browne is ``very upset'' and is resisting Sutherland's demand, the newspaper said.

`No Rift'

Browne today denied there was a falling out with the chairman. ``There is no rift,'' Browne said.

Browne oversaw BP's acquisition of Amoco Corp. in 1999 and Atlantic Richfield Co. in 2000. He established a Russian joint venture, OAO TNK-BP, in 2003, allowing BP to surpass Shell in production and market value.

Sutherland, who's also chairman of Goldman Sachs Group Inc.'s international unit, will help ensure a smooth succession, said Michael O'Sullivan, an equity strategist at State Street Global Markets.

``Under normal circumstances if John Browne wasn't balanced by a very, very strong chairman, someone like that who's been very, very successful could have a stronger hold on the company and there could be potential corporate governance issues,'' O'Sullivan said.

It would be an ``awful shame'' to lose Browne, said Neil McMahon, an analyst at Sanford C. Bernstein in London, who rates BP stock ``market perform.''

Exploration & Production

``Even if asked, I wouldn't stay on'' beyond 2008, Browne said today in a meeting with reporters in London. Browne said he won't join the company's board, or take an advisory role.

BP's exploration and production unit increased profit 32 percent to $7.8 billion from $5.9 billion a year earlier, the company said in today's statement. Refining and marketing profit jumped 46 percent to $1.86 billion from $1.27 billion.

The company's 2006 capital expenditure would rise partly because of ``sector specific inflation,'' he said.

Profit before one-time items and changes in the value of oil inventory was $6.11 billion, more than the $5.97 billion median estimate in a survey of 11 analysts by Bloomberg.

The company boosted exploration and production profit by a third in the second-quarter as operating earnings from its Russian venture climbed 18 percent.

Oil prices in New York surged 33 percent from a year earlier to average $70.66 a barrel in the second quarter.

Texas City

Hurricanes on the U.S. Gulf Coast last year idled as much as 29 percent of the nation's refining capacity, pushing fuel prices to records. BP's Texas City refinery, damaged last year by hurricanes and an explosion that killed 15, cost it $650 million in lost profits in the first quarter.

BP's $1 billion investment in the initial public offering of OAO Rosneft may enhance the relationship between Europe's largest oil company and Russia, Browne said today.

Profit at the six biggest publicly traded oil companies by sales probably jumped 23 percent to $36 billion in the quarter, based on JPMorgan Chase & Co. estimates. That's more than Venezuela's gross domestic product in the same period. Companies benefited from near-record prices, bolstered by the standoff over Iran's nuclear program and cuts to Nigerian supplies.

Shell, the second-biggest European oil company, will probably say July 27 that it earned $6.2 billion, a 19 percent jump from $5.2 billion a year earlier, a survey of 10 analysts found. Shell, based in The Hague, declined to comment.

Exxon Mobil

Irving, Texas-based Exxon Mobil, the largest publicly traded oil company, is expected to say on the same day that second- quarter profit climbed 30 percent from a year earlier, to $9.92 billion, according to the average estimate from 21 analysts surveyed by Thomson Financial.

Browne, who has said oil will fall to $40 a barrel, said in February he would return $65 billion to investors over three years should crude stay above $60 a barrel.

Of the 30 analysts that have rated BP in the past three months, 20 recommend investors ``buy'' the shares. Seven say ``hold'' and three ``sell,'' according to data compiled by Bloomberg.

BP raised its dividend to 9.825 cents a share compared with 8.925 cents a year ago.

Oil prices advanced on Tuesday, supported by violence in the Middle East, a big oil pipeline leakage in Nigeria, and concerns over refinery shut-downs in the United States, dealers said.

New York’s main contract, light sweet crude for delivery in September, won 37 cents to 75.42 dollars per barrel in electronic deals before the official opening of the US market.

In London, Brent North Sea crude for September delivery added 41 cents to 75.02 dollars per barrel in electronic trading.

“Crude futures gained ground (on Tuesday) on concerns about conflict in the Middle East conflict, refinery outages and supply disruptions in Nigeria,” said Sucden analyst Michael Davies.

“Concerns over continued violence in the Middle East were heightened last night, after Israeli government announced there will be no ceasefire in the near future and carried on their military assault on Hezbollah guerrillas.”

Israel insisted on Tuesday that it would press on with its war on Hezbollah, effectively ruling out any chance of an early ceasefire in the bloody two-week-old Lebanon conflict despite a mission to the region by US Secretary of State Condoleezza Rice.

An entire family of seven was killed when a missile slammed into their home in southern Lebanon as Israel pressed on with its air bombardments and besieged a key border town where Hezbollah has a military headquarters.

Concerns that the violence in Israel and Lebanon could spread to major crude-producing nations, such as Iran and Syria, saw oil prices soar to all-time highs above 78 dollars earlier this month.

Meanwhile Royal Dutch Shell said that a leak in an oil pipeline in southern Nigeria last Friday had cut its output there by 180,000 barrels per day.

“A total of 180,000 barrels a day has been temporally shut in and we don’t know when it will be back,” a Shell spokeswoman told AFP.

Shell has so far failed to uncover the cause of the leak to the Sambarth-Karkrama pipeline in the oil-rich Niger Delta region.

News of the leak comes as Nigeria was already experiencing a cut of about 20.0 percent in its oil exports owing to militant unrest in the Niger Delta.

Nigeria is the biggest oil producer in Africa and the world’s sixth-biggest exporter of crude.

Crude futures had closed higher on Monday owing to fears for gasoline or petrol supplies in the United States, due to refinery outages.

Cooling towers at a ConocoPhillips refinery at Wood River, Illinois, have been temporarily shut down after suffering damage in severe storms.

And the giant Amway refinery in Venezuela, which exports fuel to the United States, is set to be shut down for up to seven months after a fire last week, trade sources said.

South Korea signed a deal Monday to buy a 100 percent stake in an oil sands mine in Canada that can produce 250 million barrels of oil, Yonhap News Agency reported on Monday.

It said the estimated size of the Blackgold Mine in the Cold Lake region of Alberta will allow South Korea to extract 30,000-35,000 barrels of oil per day for the next 25 years.

Hwang Doo-yul, CEO of state-run Korea National Oil Corp. (KNOC), and Geoff Waterman, vice president of Newmont Mining of Canada, signed the deal in Seoul. The Canadian company is an affiliate of U.S.-based Newmont Mining Corp., the world's largest gold producer.

The South Korean firm is expected to begin production in 2008, with full-scale operations to commence two years later. KNOC paid $270 million for the mining rights and expects annual sales to reach $500 million once full-scale production commences.

Oil sands, also referred to as tar or bituminous sands, are deposits of bitmen trapped in a mixture of clay, sand and water. They are in essence sand or sandstone containing at least 10 percent petroleum.

There are estimated to be 175 billion barrels of petroleum that can be extracted from oil sands mines around the world, with Canada having the world's second-largest reserve of oil sands after Venezuela.

Canada, which has most of its oil sands mines in the Peace River, Cold Lake and Athabasca regions of Alberta, can churn out 4.7 billion barrels of oil on an annual basis.

The ministry said once production begins, the country's oil output self-sufficiency level could be raised by around 1.2 percent.

South Korea currently produces 115,000 barrels of oil daily from local and overseas oil fields.

Seoul wants to raise the self-sufficiency level from around 4 percent at present to 18 percent in 2013.

The price of natural gas for August delivery rose 7.6 percent Monday on the New York Mercantile Exchange to $6.605 per million Btu.

The big gain, which lifted gas to its highest level since June 22, was matched by an increase in the price of high-quality crude oil for September delivery to $75.05 per barrel.

Heating oil gained 4 cents to $1.972 per gallon, and gasoline increased 6 cents to $2.325 per gallon.

AAA said early Friday that the average U.S. price of regular gasoline was $2.989 per gallon.

Jim Rogers, the co-founder of George Soros's Quantum hedge fund, says oil prices will reach $100 a barrel, possibly this year. Merrill Lynch & Co.'s Francisco Blanch says no way.

``Unless somebody discovers something very quickly and very accessibly, we're all going to be dumbfounded at how high the price of oil will go, including me,'' Rogers said in an interview in Singapore.

Fighting in Lebanon between Israel and Hezbollah forces, backed by Syria and Iran, helped send New York crude oil for August delivery to a record $78.40 on July 14 on concern the violence may spread through the Middle East, the region that produces more than 30 percent of the world's crude.

Not to worry, says Blanch, the head of commodities research at Merrill, the world's biggest brokerage. Oil supplies would have to stop from a country such as Iran, the second-largest Middle East oil producer, to drive the market higher, he said.

``It's unlikely we will see another price rally from here, unless the current conflict expands beyond its current borders,'' Blanch said in a July 17 interview in London. ``You'd need physical disruptions, and large ones, to bring the price to $100. You'd probably need to lose Iran.''

A growing number of Wall Street traders are siding with Rogers. Bets on futures contracts for $100 oil tripled in the past three months, helped by demand for fuel from China, the world's fastest-growing major economy.

Backing Rogers

Oil has tripled in four years to more than $74 a barrel and gasoline pump prices reached $3 a gallon in the U.S., threatening to damage economic growth. Rogers says the rally will accelerate as supplies decline from aging fields and reserves become more difficult to find.

``Commodity investors looking for $100 oil will see it,'' said Philip K. Verleger, an economist who founded PK Verleger LLC, a Newport Beach, California-based energy consulting firm. Only a U.S. recession can stop the advance to $100 a barrel before the end of next year, said Verleger, also a visiting fellow at the Institute for International Economics in Washington.

Oil prices have also climbed because of pipeline attacks in Nigeria and concern Iran might cut exports to fight efforts to curb its nuclear program. Iran, which says it seeks nuclear energy for peaceful uses, has the world's second-largest oil reserves.

`Low Probability'

U.S. crude inventories are swelling as OPEC members pump almost as much as they can. U.S. oil stockpiles are 9.5 percent higher than the average level of the last five years, according to the Energy Department.

Investment in new rigs and refineries is paying off, increasing the cushion of spare capacity that protects against shortages. The Paris-based International Energy Agency estimates OPEC's idle crude oil capacity will reach 4.2 million to 6.1 million barrels a day in 2011, up from about 2 million a day now.

Oil at $100 a barrel is ``a very low probability,'' said Tim Evans, an energy analyst at Citigroup Inc. in New York.

The $100 level became a market benchmark in March 2005, when Goldman Sachs Group Inc. analyst Arjun Murti wrote that ``we believe oil markets may have entered the early stages of a `super spike' period, which we now think can drive oil prices toward $105 per barrel.'' The report indicated a range between $50 and $105 through 2009. Oil last closed below $50 a barrel in May 2005.

The number of futures contracts bearing the option to buy crude at $100 this year is 53,047, triple the amount on April 21. The contract gives a buyer the right, but not the obligation, to buy a commodity at an agreed price within a set time period. The figures are for the September through December contracts.

Barclays's View

``$100 oil is not a ridiculous idea,'' Paul Horsnell, head of commodities research at Barclays Capital in London, said in a July 17 interview. ``It is a possibility'' should the Middle East conflict cut off supplies, said Horsnell, the second-best oil- price forecaster surveyed by Bloomberg last year.

Louise Yamada, an analyst who correctly predicted in July 2004 that oil would reach $67 within ``months to years,'' said she expects oil to reach $84 a barrel in the ``short term,'' then keep rising. ``I wouldn't be surprised to see oil in excess of $100,'' she said. Oil was near $40 when she made her 2004 prediction. It reached $67 a barrel in August 2005.

Adjusting for inflation, oil exceeded $86 in early 1981, when Iranian production collapsed following the country's 1979 Islamic revolution, according to U.S. Energy Department data.

The first so-called ``oil shock'' was in 1973 and 1974, when inflation-adjusted oil prices rocketed fivefold to about $50 a barrel. It occurred after Saudi Arabia and other Arab producers halted exports to the U.S. The embargo, protesting U.S. support for Israel, resulted in American motorists waiting in long lines for gasoline.

Forecasts Rise

Barclays Capital's Horsnell and Kevin Norrish in January raised their 2006 New York oil price forecast to $68, including $72.20 for the fourth quarter, citing increasing risk to Iranian oil supplies because of the nuclear dispute. Goldman Sachs increased its 2006 forecast the same day, to $68.50 a barrel.

``Crude oil prices for the first quarter of 2007 are already trading at $80 a barrel, so to go to $100 would be the same as getting to $25 when oil was at $20, and there are a number of events that could do that,'' Horsnell said. Prices of $100 are not in their base forecast, he said.

Rogers said declining supplies from existing fields and a lack of new oil discoveries will drive prices higher.

``The bull market has about 10 or 15 years to run,'' he said. ``How high it's going to go I don't have a clue during that time, certainly over $100 a barrel or over $150 a barrel before it's over.''

Several of the world's largest oil companies hope to tap into possible offshore oil and gas reserves as Greenland opened a new round of concessions last week for exploration licenses in the fragile Arctic region.

Eyes of an oil-thirsty world have turned to the shores of the semiautonomous Danish territory amid rising fuel prices, Mideast instability and concerns over future supplies.

The Greenland government hopes to make big gains from any reserves found in its icy waters, but environmentalists say oil exploration there could damage a sensitive region already under threat by global warming.

"We know for sure there is oil, but we don't know how much exactly and whether it can be profitable," said Joern Skov Nielsen, manager of Greenland's Bureau of Minerals and Petroleum, ahead of the three-day meeting in Ilulissat, on the giant island's west coast.

Speaking by telephone, Skov Nielsen declined to say which companies were attending the meeting and what conditions the Greenland government would put forth for exploration in the Disko Bay — the area being opened for the current round of concessions.

'Top 15 biggest'
"All I can say is that the top 15 biggest in North America and Europe are here," he said.

The fact that those attending the meeting have bought seismic data collected in the Disko-Nuussuaq region, was "an unmistakable sign of interest," Skov Nielsen said. The deadline for bids is Dec. 15.

Exploration in one of the most remote corners of the globe is no easy task. Bidders should be able to tackle rough weather and ice while avoiding damage to Disko Bay's fragile ecosystems.

Skov Nielsen said an environmental impact assessment will be performed in the area to identify possible consequences of oil exploration, but environmental activists said that was not enough.

Tarjei Haaland of Greenpeace Denmark said it was "insane" to even think about oil exploration in the sensitive environment.

'Extremely difficult' area
"We all know that it's an extremely difficult region to work in, and if there is an oil disaster in the area, it can be harmful," Haaland said. He suggested money devoted to oil exploration would be better spent on developing alternative fuels.

Oil exploration off west Greenland started in the 1970s but stopped after five failed drilling attempts. Activities resumed in 2001 off Nuuk, the Greenland capital. Canadian company EnCana last year became the first company to win a license for offshore oil and gas exploration off Nuuk.

In 2008, Calgary, Alberta-based EnCana is expected to start drilling in areas believed to have reserves ranging from 400 million to 1.2 billion barrels of oil.

Five of the world's largest energy companies are expected to report combined second-quarter profits next week of more than $30 billion, a bounty fueled by worldwide economic growth and political instability that helped keep the price of crude oil above $70 a barrel.

The petroleum industry is braced for a backlash in Washington, where elected o…žcials are concerned about constituents in parts of the country paying more than $3 a gallon at the pump.

However, some analysts say companies could face less criticism than usual given the attention focused on violence in the Middle East.

Whatever the political fallout, the industry has done right by Wall Street's standards. The five oil behemoths releasing quarterly results next week -- BP PLC, ConocoPhillips, Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell PLC -- earned an estimated $33.6 billion, or 32 percent more than a year earlier, according to analysts surveyed by Thomson Financial.

World oil prices that rose 33 percent, on average, helped drive the earnings growth. On Friday, U.S.-benchmark crude-oil futures settled at $74.43 as traders nervously eyed an expected Israeli ground invasion of southern Lebanon. The market fears that the fighting could draw Iran, a key oil producer and supporter of Hezbollah, into the conflict.

BP will be the first major oil company to report second-quarter results. The London-based company is expected to disclose Tuesday the weakest year-on-year performance among its peers, weighed down by the loss of output from a massive offshore platform damaged by last summer's hurricanes, and lost production and repair costs associated with a deadly explosion last year at a Texas refinery.

Even so, BP could post net income of $6.3 billion, or 11 percent more than a year earlier, analysts say -- showing just how effective soaring oil and gasoline prices can be at masking operational difficulties.

Energy consumers deserve credit, too; the industry benefited from a global fuel appetite that just wouldn't quit. The International Energy Agency estimates that world oil demand averaged 82.4 million barrels a day in the second quarter, or 1.5 percent above the prior year, generating more than $500 billion for petroleum producers. That's roughly equivalent to the annual gross domestic product of South Africa.

The average profit margin from refining was $19.10 a barrel of crude, or 60 percent higher than a year ago, according to J.P. Morgan. Independent refiners such as Valero Energy Corp. and Tesoro Corp., which report their secondquarter results in early August, were the greatest beneficiaries.

One slight drag on the integrated oil industry's performance was a year-on-year decline in average U.S. natural gas prices, which have continued to slump into the third quarter because of record U.S. inventories following a mild winter.

Going forward, the oil majors' profit growth could face stronger headwinds, said John Parry, senior equity analyst at John S. Herold.

Looking beyond summer -- and the threat of hurricanes -- Parry sees oil prices flattening out and then tailing off toward the end of 2006, especially if economic growth continues to slow, as Federal Reserve Chairman Ben Bernanke warned twice this week.

J.P. Morgan is forecasting average oil prices of $54 a barrel in 2007, and the IEA says the world's supply cushion will grow considerably next year as more production from Africa, the Caspian Sea and the recovering Gulf of Mexico comes on stream.

Oil held over $74 a barrel on Friday on concerns about escalating violence in the Middle East after Israel called up reservists in what could be a ground offensive against Hizbollah guerrillas.

Israel ordered several thousand reserve soldiers to report for duty as signs grew that the army may be preparing for an invasion of southern Lebanon.

Production snags at U.S. refineries also supported prices.

U.S. crude for September gained 18 cents to $74.45 a barrel at 1800 GMT. London September Brent crude traded up 16 cents to

$73.88.

"We're having a strong end to the week as usual, supported by refinery problems in the U.S. and uncertainty over what may happen in the Middle East," said Christopher Bellew, an oil broker at Bache Financial in London.

Oil has slid from records over $78 a barrel struck last Friday on fears the fighting between Israel and Hizbollah could spread, but remains up about 22 percent this year.

U.S. Secretary of State Condoleezza Rice will leave for the Middle East on Sunday and begin a round of visits there on Monday to seek to reduce fighting between Israel and Hizbollah.

Oil prices are sensitive to tension in the Middle East, which provides almost a third of the world's oil although neither Israel nor Lebanon are producers.

"Shorts may want to cover going into the weekend, where the possibility exists that the Israeli/Hizbollah conflict could take a turn for the worse," Man Financial said in a report.

"However, if the fighting remains relatively localized, values could open weak on Monday."

President Bush will meet with officials from Saudi Arabia, the world's top oil producer, on Sunday to discuss the Israel-Lebanon situation.

REFINERY GLITCHES

U.S. refinery snags gave some support to prices this week, and traders were also wary of any weather-related disruptions as the Atlantic hurricane season starts.

Gasoline supplies in the United States are a major concern for oil markets during summer, when demand peaks as motorists take to the road for holidays.

ConocoPhillips shut its 306,000 barrel-per-day (bpd) Wood River refinery in Illinois after a power cut due to storm damage. Valero Energy Corp. shut a gasoline-making unit on Thursday at a Louisiana refinery for unplanned repairs.

"If there's any disruption to refineries, this will be a major concern," said Gerard Burg, energy economist at the National Australia Bank.

Tropical storm Beryl weakened and headed up the U.S. northeast coast on Friday, away from Gulf of Mexico refineries and oil fields damaged by hurricanes last summer.

Last year's hurricanes Katrina and Rita crippled U.S. oil and gas infrastructure along the U.S. Gulf Coast, causing oil prices to soar to then-record highs.

Crude oil prices were steady Friday as concerns about Mideast fighting were weighed against comments by the U.S. Federal Reserve chief that surging energy prices are crimping economic growth.

Light sweet crude for September delivery slipped 12 cents to $74.15 a barrel on the New York Mercantile Exchange.

"The energy futures all look like they've entered a period of consolidation or book squaring ahead of the weekend," Citigroup oil analyst Timothy Evans wrote.

Gasoline futures rose less than a penny to $2.255 a gallon, reflecting concerns about refinery outages. Valero Energy Corp. said Thursday it would shut down its St. Charles, La., refinery for 20 days for repairs, causing a total loss of 1.3 million barrels of gasoline output.

September Brent on London's ICE Futures exchange rose 61 cents to $74.33 per barrel.

Israel massed tanks and troops on the Lebanese border Friday and warned civilians to flee Hezbollah-controlled southern Lebanon as it prepared for a likely ground invasion to set up a deep buffer zone. The oil market is fearful the fighting could spread throughout the region and threaten supplies.

But U.S. Federal Reserve Chairman Ben Bernanke's comments served as a moderating influence on the market. Bernanke said Thursday "the increase in energy prices is clearly making the economy worse off both in terms of real activity and in terms of inflation."

If oil prices were to rise another $10 or $15 a barrel, there would be "significant consequences" for the economy, he added. He said high energy prices are already hurting the economy, "in terms of real activity and in terms of inflation."

The sudden eruption of fighting between Israel and militants in Lebanon last week lifted crude futures to a record $78.40 last Friday, on fears that the fighting would escalate into a regional war and disrupt supplies.

While oil prices have receded from recent highs after data showed that U.S. petroleum inventories grew across the board last week, worries about the Middle East crisis linger.

"It is difficult to construct an argument for lower prices as long as the situation in the Middle East persists. It still has the potential to mutate into an uglier and uglier state of affairs with each passing day," wrote Fimat USA broker Mike Fitzpatrick in a research note.

Energy analyst Paul J. Harris of the Bank of Ireland Global Markets in Dublin said that while traders are closely following the fighting, "the market seems less concerned ... than a week ago," because the conflict shows no sign of spreading. Still, he said, "risks remain on the upside."

Oil prices steadied above $74 a barrel on Friday, after a slump from last week's record as there were no signs Middle East violence would affect oil exports and higher US stock levels provided a better supply buffer.

US light crude for September shed 17 cents to $74.10 a barrel by 0355 GMT. The previous front-month August contract gained 42 cents on Thursday, when gasoline prices carried the complex higher on news of unplanned outages at two US refineries.

London Brent crude traded down 22 cents to $73.50.

Prices dipped as the US Secretary of State Condoleezza Rice plans to go to the Middle East as early as next week to press for a political solution to the fighting between Israel and Hizbollah guerillas in Lebanon.

The US stresses the need for a "durable" solution to the increasingly bloody 10-day war before any cease-fire can be implemented, unlike the United Nations and key European allies that want a cease-fire as soon as possible.

"The real concern is we could see other (Middle East) countries dragged into the situation and that's the big worry. If the negotiations ends favourably, that will be a bearish factor on crude," said Gerard Burg, energy economist at the National Australia Bank.

A surprise build in US gasoline by 1.5 million barrels and crude stocks by 200,000 barrels last week also undermined prices.

But losses were capped in view of strong demand in the US, where government data showed that four-week average US gasoline demand, which accounts for more than a tenth of the world's total consumption of oil, rose 1.9 per cent from a year ago.

A slew of refinery outages in the US, taking place during the peak Atlantic hurricane season, also supported prices.

ConocoPhillips has shut its 306,000 barrel-per-day (bpd) Wood River refinery in Illinois after a power cut. Valero Energy Corp. shut a gasoline-making unit on Thursday at a Louisiana refinery for 20 days for unplanned repairs.

"If there's any disruption to refineries, this will be a major concern," added Burg, referring to the hurricane season.

Last year's devastating hurricanes Katrina and Rita crippled US oil and gas infrastructure along the Gulf of Mexico, causing prices to soar to then-record highs.

Also keeping markets on tenterhooks is Iran's nuclear dispute with the West. European nations distributed a draft United Nations resolution on Thursday that threatens to consider sanctions if Tehran fails to suspend uranium enrichment.

In OPEC exporter Nigeria, where production has been cut by militant attacks, US oil major Chevron said it has recovered 50 to 60 per cent of 140,000 bpd output lost to ethnic fighting in the Niger Delta in southern Nigeria in 2003.

Oil prices ended a 7% rout today as production problems at two major refineries in the United States rekindled worries over gasoline supplies at the height of summer vacation season.

US crude for August delivery, which expires Thursday, rose 42 cents to $73.08 a barrel while London Brent for September delivery slipped 18 cents to $73.72.

Both benchmarks for global oil prices had been in a dive since last week that deepened yesterday after the US government reported surprise builds in stockpiles of crude and gasoline. US oil's push higher came after leading North American refiner Valero Energy Corp. announced it shut a gasoline-making unit at its St. Charles, Louisiana, refinery for 20 days for unplanned repairs. ConocoPhillips, meanwhile, said it shut its big Wood River refinery in Roxana, Illinois, because of a power outage caused by severe storms.

The energy markets tend to focus on gasoline during the summer months when US drivers take to the roads for vacations, bumping up demand for the fuel to seasonal peaks.

US oil has dropped from the record $78.40 hit last week. Government data Wednesday showed US inventories of gasoline rose by 1.5 million barrels and crude stocks climbed 0.2 million barrels due to strong imports, counter to expectations of a decline. But the data also showed that four-week average US gasoline demand, which accounts for more than a tenth of the world's total consumption of oil, had risen 1.9% from a year ago.

The market shrugged off comments from Iran, which repeated its determination to produce atomic fuel in defiance of international calls to halt the work. The world's fourth largest oil exporter said it wanted to resolve the dispute diplomatically and was still reviewing a package of nuclear proposals backed by six nations.

Weatherford International Shares Drop After 2Q Meets Street Forecast but Disappoints Investors

HOUSTON -- Weatherford International Ltd. saw its shares slide in Thursday trading, a day after the oil field services contractor reported second-quarter profit that just met Wall Street's expectations.

Weatherford posted earnings of $186.8 million, or 52 cents per share, versus $95.2 million, or 32 cents per share, in the year-ago period. Excluding a one-time charge, earnings were 53 cents per share -- in line with the consensus estimate of analysts surveyed by Thomson Financial.

Revenue rose 64 percent to $1.54 billion from $937.3 million, slightly ahead of analysts' target of $1.52 billion.

Meeting Wall Street's forecast did little to inspire investors, who may have been hoping for a third straight quarter of better than expected results.

The company's shares dropped $2.35, or 4.8 percent, to $46.21 in midday trading on the New York Stock Exchange. The stock has moved between $28.50 and $58.73 over the past year.

"We expect quarterly event-driven investors to be disappointed," said Merrill Lynch analyst Alan D. Laws, in a client note. "Bulls may focus on the stronger than expected international results; others could dwell on the weaker seasonal results from Canada."

Weatherford topped analyst estimates by 6 cents in the first quarter of 2006 and 3 cents in the fourth quarter of last year, according to Thomson Financial.

Oil prices bounced back above $73 a barrel on Thursday, with traders catching their breath after an unexpected build in U.S. crude and gasoline inventories extended a steep slump from last week's record high.

U.S. light crude for August delivery rose 49 cents to $73.15 a barrel by 0553 GMT, attempting to end a three-day slide that has wiped more than 5 percent off prices. London Brent crude for September climbed 46 cents to $74.36.

Oil tumbled 88 cents on Wednesday after government data showed inventories of gasoline rose by 1.5 million barrels and crude stocks climbed 0.2 million barrels due to strong imports, counter to expectations of a decline in supplies.

But the data also showed that four-week average U.S. gasoline demand, which accounts for more than a tenth of the world's total consumption of oil, had risen 1.9 percent from a year ago.

"Follow-through price action should be bullish, due to strong gasoline demand of 9.6 mb/d over the last four weeks," Calyon investment bank energy analyst Mike Wittner said in a note.

But he warned that fundamentals may be overwhelmed by the downward momentum of the steep profit-taking decline from Friday's record $78.40 a barrel, as a fear premium caused by flaring violence between Israel and Hizbollah dissipated.

"This correction from a geopolitical spike may overwhelm continued strong fundamentals in the very near-term," he said.

Dozens of Israeli warplanes pounded Lebanon on Thursday, a day after 63 civilians were killed in the deadliest toll of the nine-day conflict that has unnerved markets.

There was no sign that Israel or its Lebanese Shi'ite foes were ready to stop the fighting, but also no indication that the violence would engulf oil-producing neighbors or affect exports from Syria or Iran, both supporters of Hizbollah.

Oil, which moved in lockstep with tumbling metals prices earlier this week as investors fled the whole complex, diverged on Wednesday when gold and other commodities rallied on signals of a possible pause in the U.S. interest-rate rise cycle.

Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee that while the U.S. economy still faced inflation risks, cooler growth should curb price pressures over time.

OPEC President Edmund Daukoru said that current price levels posed a threat to the world economy, but a price in the mid-60-dollar range would be more acceptable.

The latest spike in oil prices is "very uncomfortable" and is having a negative impact on the world economy, Edmund Daukoru, president of the Organization of Petroleum Exporting Countries, said Wednesday.

Daukoru, who is also Nigeria's top oil official, said the conflict between Israel and Hezbollah was responsible for the latest spike, in which U.S. crude oil futures hit $78.40 a barrel last week, and that OPEC had plenty of spare production capacity should it be needed.

"If it would have stabilized around the mid-60s, I don't think people would complain too much," he said of the oil price in dollars per barrel. "We are getting used to that, but the latest shoot-up to the mid-70s and above is very uncomfortable," Daukoru said on the sidelines of a conference in the Nigerian capital.

"Clearly the latest flare-up between Israel and Hezbollah, that is really the reason for the latest spike," he said. "It is always unfortunate if we have to address issues outside the power of OPEC."

High prices bring more revenue to OPEC in the short term, but exporters worry that sustained increases hurt the global economy and encourage consumers to invest in alternative energy.

Asked whether current prices were hurting the economy, he said, "At such high prices, it must have an impact."

Daukoru said that he would travel to the Gulf next week to address some internal OPEC issues like a coming summit meeting and that he would take advantage of the trip to discuss the oil market situation.

"We do our best to moderate the market," he said, "but with the current level of volatility, one only can take short- term decisions. We tend to react at three-monthly intervals."

BP's Russian unit is faulted

The Russian Natural Resources Ministry has said that TNK-BP, BP's Russian unit, may lose part of its operating license as the company exceeds the permissible number of idle oil wells, Bloomberg News reported from Moscow.

"Our monitoring shows that 30 percent of TNK-BP's oil wells are inactive," Nikolai Gudkov, a ministry spokesman, said in an interview. "This provides grounds for an examination and could entail sanctions up to revoking their licenses." The maximum proportion of idle oil wells allowed under Russian law is 10 percent, he said.

TNK-BP is seeking to restore output at some oil wells, a company spokeswoman, Marina Dracheva, said.

Crude oil fell for a third day after a government report showed an unexpected increase in U.S. oil and gasoline inventories.

U.S. gasoline supplies rose 1.5 million barrels to 214.2 million in the week ended July 14, according to the Energy Department. Crude oil stockpiles rose 151,000 barrels to 335.5 million. Prices surged to a record last week on concern that the conflict between Israel and Hezbollah would spread through the Middle East, source of a third of the world's oil.

``We are in pretty good shape as far as supplies are concerned,'' said Justin Fohsz, a broker at Starsupply Petroleum, a division of GFI Group Inc., in Englewood, New Jersey. ``As long as there is violence in the Middle East the market will be on edge. Prices can move sharply one way or another on a dime based on the latest headlines.''

Crude oil for August delivery fell $1.39, or 1.9 percent, to $72.15 a barrel at 11:32 a.m. on the New York Mercantile Exchange. The contract touched $71.80, the lowest since June 28. Futures reached $78.40 on July 14, the highest since trading began in 1983. Prices are up 25 percent from a year ago.

Gasoline for August delivery declined 5.7 cents, or 2.5 percent, to $2.21 a gallon in New York. Prices are up 32 percent from a year ago.

U.S. gasoline stockpiles were expected to fall 875,000 barrels, according to the median of forecasts by 16 analysts surveyed by Bloomberg News. Inventories declined 1.3 million barrels during the same week last year, according to Energy Department figures. Crude oil supplies were expected to drop 650,000 barrels.

Gasoline inventories are up 1.3 percent from the five-year average for the week, the department said. Crude oil stockpiles are up 9.5 percent from the five-year average.

Israeli Offensive

Israel began bombarding Lebanon after Hezbollah forces kidnapped two Israeli soldiers on July 12. Prices surged in 1974, helping spur a recession in the developed world, after an oil embargo that followed the Arab-Israeli war in October 1973. The Middle East holds 62 percent of global reserves, according to BP Plc.

``Some Israeli comments hint that the end of this operation is in sight,'' said Craig Pennington, global head of energy research at Schroder Investment Management Ltd. in London. ``The situation is bad but the actual threat to oil shipments is far less than thought last week.''

Iran warned Israel against attacking Syria, saying it will face the ``greatest damage'' if it does. Iran's foreign ministry said on July 16 that Iran's support for Lebanon, Syria and the Palestinians was only ``humanitarian and spiritual,'' rejecting Israeli allegations that it sent missile technology and military personnel to support Hezbollah fighters in southern Lebanon.

A Blunt Weapon

``I believe Iran is quite willing to use oil as a weapon but not in this case,'' Pennington said. ``It's too blunt a weapon and Iran wouldn't want to cut supplies to countries like China and Japan, which are not involved in the issue.''

Prices jumped 18 percent this year amid concern Iran, the fourth-largest producer, might cut exports because of efforts to curb its nuclear program. The United Nations Security Council is meeting this week to work on a draft resolution demanding the suspension of Iran's uranium-enrichment program, which the U.S. suspects is cover for the development of nuclear weapons.

Brent crude oil for September settlement fell $1.22, or 1.6 percent, to $73.14 a barrel on the London-based ICE Futures exchange.

Iraq may open its potentially lucrative oil business to foreign investors by the end of the year, Energy Secretary Samuel W. Bodman said after a day of meetings with Iraqi counterparts in Baghdad.

"Iraq will only realize its very considerable potential as an oil producer with the help of investors," he said. "They need to pass a hydrocarbon law under which foreign companies can invest."

Outside capital could help revamp pumps, pipelines and refineries that were neglected for a quarter-century or longer under Saddam Hussein, Bodman said.

Crude oil fell for a second day on speculation shipments from the Middle East, source of a third of the world's oil, won't be disrupted by the military conflict in Lebanon.

``Over the last few weeks we have already priced in a couple of worst-case scenarios,'' said Kyle Cooper, director of research at IAF Advisors in Houston.

Prices rose to a record last week after Israeli forces attacked Lebanon in response to the seizure of two soldiers on July 12. No Middle East nations have threatened to cut exports because of the Israeli offensive. Oil surged in 1974, helping spur a recession in the developed world, after an oil embargo that followed the Arab-Israeli war in October 1973.

Crude oil for August delivery fell $1.70, or 2.3 percent, to $73.60 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $78.40 on July 14, the highest since trading began in 1983. Prices are up 28 percent from a year ago.

Brent crude oil for September settlement rose $1.31, or 1.7 percent, to $74.61 a barrel on the London-based ICE Futures exchange.

Israeli Prime Minister Ehud Olmert told the United Nations he will press the military operation in Lebanon until the soldiers are returned and Hezbollah is disarmed. Yesterday, Olmert blamed the conflict on Iran and Syria.

`No Direct Impact'

``There is no direct impact on oil shipments as a result of the violence but we all know that the big guy behind Hezbollah is Iran,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Tilburg, the Netherlands. ``There is a big concern that Israel may take action against Iran, which could have a major impact.''

Prices jumped 21 percent this year amid concern Iran, the fourth-largest producer, might cut exports because of efforts to curb its nuclear program. Iran may hold talks with the European nations to try to solve the dispute over the Islamic republic's nuclear program, President Mahmoud Ahmadinejad said today, the state-run Iranian News Agency IRNA reported.

Oil held firm above $75 a barrel today after a profit-taking slump, supported by accelerating economic expansion in number-two oil consumer China and the risk of expanding Middle East violence.

US light sweet crude for August delivery rose 15 cents to $75.45 a barrel in early trade, taking pause from yesterday’s 2.25% dive amid a commodity-wide rout that knocked gold 2% lower and hammered copper 3%.

Brent crude for September gained 6 cents to $75,98 a barrel.

Oil prices are nearly $3 below last Friday’s record-high of $78,40 after dealers took some relief that mounting violence between Israel and Hezbollah had not yet engulfed oil-rich neighbours. But analysts warned against complacency.

"There is the danger that the Middle East situation could spin out of control, but there is also a good chance that things will settle down," said Tony Nunan, a risk manager at Mitsubishi Corp. in Tokyo.

World efforts to defuse the growing crisis have yet to show any signs of ending Israel’s week-long assault in retaliation against Hezbollah attacks. Warplane attacks on south Lebanon killed six people today, taking the toll to 210.

Hezbollah, the guerrilla group that is backed by Syria and Iran and is part of Lebanon’s government, has attacked a naval vessel and fired hundreds of rockets at northern Israel.

Oil traders fear the violence - triggered when Hezbollah seized two Israeli soldiers and killed eight on July 12 - could engulf major regional crude oil producers, who provide nearly a third of the world’s oil.

Lebanon has repeatedly called for an immediate ceasefire, but world powers said any solution to the crisis must include the release of the two soldiers. Israel also wants Hezbollah to disarm in line with United Nations Security (UN) Council resolutions.

"The market’s biggest fear is that Iran, a financial backer of Hezbollah and Opec’s number two supplier, could be drawn into the conflict," said Andrew Harrington from ANZ Bank.

The conflict may also compound the haggling between the West and Iran over Tehran’s nuclear programme, a stand-off that has fuelled oil’s 24% gain this year on fears that the exporter could use its crude supplies as political leverage.

Iran funded and supplied Hezbollah during the 1980s, but denies supplying weapons in the latest round of violence, saying its support is purely moral rather than military.

Perennial tension in Iraq also kept prices on the boil, with the head of the country’s North Oil Company kidnapped in the capital, the second high-profile abduction in two days.

Iraq was forced to cancel its latest tender to sell Kirkuk crude from Turkey after halting pipeline exports 11 days ago.

Fresh fuel for gains emerged today from China, which reported second-quarter growth of 11.3%, faster than the 10.5% predicted by analysts and even more than the 10,9% leaked to a state-run paper last week.

The National Bureau of Statistics said that growth quickened from the first quarter’s 10,3% on strong investment and industrial output, giving traders more confidence that recently robust oil demand indicators may extend to later this year.

Implied oil consumption grew at double-digit rates in April and May, Reuters calculations based on official data show, the fastest rate since 2004’s explosive 15% spurt that sent shockwaves through the global oil market.

Data last week showed oil product imports also surged last month, hinting at a third-straight month of healthy growth as Beijing’s modest fuel price rises encourage refiners to raise domestic sales while not cutting into end-user demand.

Oil fell more than 2 per cent on Monday amid relief that a raging conflict between Israel and Lebanese Hizbollah guerrillas had not spread to other countries in the oil-rich Middle East.

US light crude settled down US$1.73 at US$75.30 a barrel, US$3 below the high of US$78.40 hit on Friday. Brent for September traded US$1.66 lower to US$75.92, after touching a record US$78.18 a barrel early in the session.

In the sixth day of escalating violence, Israeli airstrikes killed more than 42 people in Lebanon and Hizbollah rockets slammed into parts of northern Israel, but the fighting did not spread as some energy dealers had feared.

"The fighting didn't really extend into Syria or involve Iran. That was the big concern for oil traders," said Phil Flynn, analyst at Alaron Trading in Chicago. "It's also option expiration day."

Israel dismissed as premature a UN proposal for an international peacekeeping force to help end the worst fighting across the Israeli-Lebanese border in more than 20 years. Oil had weakened early in the day on a report, quickly denied by Israeli officials, that Israel would soon end its offensive.

"Given the importance of geopolitics to the market at the moment, prices will see-saw with the news flow," said Eoin O'Callaghan, economist at BNP Paribas.

Israeli aircraft blasted Lebanon on Monday after Hizbollah rockets struck deeper than ever into Israel, with no diplomatic initiative in sight to end the fighting.

Neither Israel nor Lebanon are oil producers, but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output.

In Iraq, scrambling to restore its oil exports to pre-war levels, the head of the country's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.

Analysts saw no let-up in prices in the near term.

"We would expect front-month prices to rise above US$80 this quarter," said O'Callaghan. "On the one hand geopolitics, and on the other fundamentals are tight. And we also have the possibility of hurricanes."

Opec said on Friday that high prices and slower economic expansion would moderate global oil demand growth next year. Opec economists forecast oil demand would rise by 1.3 million barrels per day, down from 1.4 million bpd in 2006.

The producer group expects the need for its oil to fall next year as more projects from rival suppliers come on line, allowing Opec to rebuild its spare capacity.

A senior Opec delegate on Monday said the group could do nothing to lower oil prices as they are being driven by Middle East violence rather than any shortage of oil

The world does not need more oil, but more investment in production capacity to deal with supply shocks, the head of the Paris-based International Energy Agency told Reuters.

Analysts have expressed concerns about the effects of high energy prices on global economic growth. But US Energy Secretary Sam Bodman said on Friday the economy of the top energy consumer has held up against rising fuel costs.

Oil slipped from record highs on Monday in volatile trading as fighting raged between Israel and Lebanese Hizbollah guerrillas.

Concern that the conflict could escalate and spread to Middle East oil producers had earlier sent London Brent crude to a record high.

London Brent for September was down 46 cents at $77.12 a barrel by 1359 GMT, after earlier touching a record $78.18 a barrel.

U.S. light crude was down 46 cents at $76.57 a barrel, over $2 below the high of $78.40 hit on Friday.

Both markets fell sharply after Israel's Channel 10 television cited a senior military official stating that Israel could end its Lebanon offensive within days. The Israeli government quickly denied the report, but it was enough to prompt a round of profit-taking after a four-day rally on oil.

"Given the importance of geopolitics to the market at the moment, prices will see-saw with the news flow," said Eoin O'Callaghan, economist at BNP Paribas.

"There has been so much geopolitical news in so short a time that you are going to get large fluctuations in prices as the news flow changes."

Israeli aircraft blasted Lebanon on Monday after Hizbollah rockets struck deeper than ever into Israel, with no diplomatic initiative in sight to end the fighting.

Neither Israel nor Lebanon are oil producers, but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output.

REGIONAL HUE

The conflict threatens to suck in Hizbollah's Syrian and Iranian allies, and to compound the conflict between the West and Iran over Tehran's nuclear programme.

"The crisis has quickly taken on a regional hue, with both Washington and Tel Aviv accusing Iran and Syria of orchestrating the attacks," said Washington-based energy consultants PFC in a report.

"As a result, U.S. policy toward Tehran is likely to harden even further, and could undermine already fraught efforts to resolve the Iranian uranium enrichment issue diplomatically."

The world's fourth largest oil exporter insists it is enriching uranium for electricity generation, but the United States fears that could be a front for bomb-making activities.

On Sunday, Iran condemned a decision to return its nuclear file to the U.N. Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons.

In Iraq, scrambling to restore its oil exports to pre-war levels, the head of the country's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.

Analysts saw no let-up in prices in the near term.

"We would expect front-month prices to rise above $80 this quarter," said O'Callaghan.

"There is plenty to keep prices inflated. On the one hand geopolitics, and on the other fundamentals are tight. And we also have the possibility of hurricanes."

OPEC said on Friday that high prices and slower economic expansion would moderate global oil demand growth next year.

OPEC economists forecast oil demand would rise by 1.3 million barrels per day (bpd) down from 1.4 million bpd in 2006.

The producer group expects the need for its oil to fall next year as more projects from rival suppliers come on line, allowing OPEC to rebuild its spare capacity.

Analysts have expressed concerns about the effects of high energy prices on global economic growth. But U.S. Energy Secretary Sam Bodman said on Friday the economy of the world's top energy consumer has held up against rising fuel costs.

Oil prices were higher in Asian trade this morning as violence continued to rage in the Middle East.

New York's main contract, light sweet crude for delivery in August, was trading at $77.35 a barrel, up from $77.03 in the US late on Friday, when it struck an all-time high of $78.40. Brent North Sea crude for August was at $77.27, having hit a record $78.03 on Friday.

Dealers said oil looked set to break the $80 barrier, with some even talking about the possibility of $100 as the Group of Eight (G8) major powers warned of 'serious' challenges posed by rising crude prices.

'We have to deal with serious and linked challenges such as high and volatile oil prices,' the G8 leaders said in a statement adopted at their summit in Saint Petersburg in Russia.

Leaders of the world's most powerful nations pledged to promote 'open, transparent' energy markets, while vowing to pursue 'development of alternative energy sources, including nuclear power.

Oil prices have spiked since Israel launched a wide military offensive across Lebanon on Wednesday, sparked by the abduction of two Israeli soldiers.