Oil Trades Below $144 as Iran Plans to Maintain Nuclear Program

By Nesa Subrahmaniyan and Christian Schmollinger

July 7 (Bloomberg) -- Crude oil traded below $144 a barrel in New York on concern that a standoff over Iran's nuclear program may lead to a military conflict, disrupting supplies from the Middle East.

Iran signaled it will maintain its uranium enrichment, giving a negative response to the international community's offer a day after positive talks with the European Union, the Financial Times reported on its Web site today. Oil reached a record $145.85 on July 3 on speculation any attack on Iran may disrupt exports from OPEC's second-biggest producer.

``The concerns for an attack are quite high and clearly the ramifications for a potential attack is a key driver for prices,'' Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne, said in a Bloomberg Television interview. ``Prices have been driven by most notably security of supply issues.''

Crude oil for August delivery traded at $143.74 a barrel on the New York Mercantile Exchange at 12:51 p.m. in Singapore. It fell as much as $1.66 to $143.63 a barrel earlier today.

On July 4, the contract dropped as low as $1.59 to $143.70 a barrel in electronic trading. Contracts from July 4 will be settled under today's trades because of the U.S. Independence Day holiday.

Oil's 50 percent gain this year is causing consumer prices to surge and crimping profits for airlines as costs rise. Korean Air Lines Co., South Korea's largest carrier, said today it will report a loss for the second quarter because of a surge in jet fuel prices.

Close Strait

Iran's nuclear policy hasn't changed, state news agency IRNA reported July 5, citing Iranian government spokesman Gholam- Hossein Elham a day after the country's response to proposals on its nuclear work.

The government in Tehran has prepared and presented its reply ``with a focus on common ground and a constructive view,'' Iran state television cited Saeed Jalili, secretary of Iran's Supreme National Security Council, as saying in a telephone call with European Union foreign policy chief Javier Solana.

Iran will close the Strait of Hormuz, through which the bulk of Middle East oil is shipped, if the country is attacked, state- run Fars news agency reported July 5, citing a military commander.

``All countries should know that if Iran's interests in the region are ignored, it is natural that we will not allow others to use'' the waterway, Fars cited Armed Forces Chief of Staff Hassan Firouzabadi as saying.

The Straits of Hormuz waterway alongside Iran is used to channel 20 percent of world oil supply. Other Middle East producers that use the straits to ship oil include Saudi Arabia, the world's biggest oil producer, Iraq and Kuwait.

Bush Pressure

An attack on Iran would ``provoke an unimaginably fierce response'' and ``oil prices would climb to unpredictable records,'' Oil Minister Gholamhossein Nozari said, according to the Oil Ministry's official news agency, Shana, yesterday.

Brent crude oil for August settlement was at $144.40 a barrel, down 2 cents, on London's ICE Futures Europe exchange at 12:36 p.m. Singapore time. Futures climbed to $146.69 on July 3, a record intraday price.

President George W. Bush said yesterday the U.S. will keep pressing Iran to stop enriching uranium. Iran must heed ``the just demands of the world to verifiably suspend its enrichment program,'' Bush said in Toyako, Japan.

European governments have joined the U.S., Russia and China in offering economic and technology incentives in exchange for Iran suspending work on developing material that can be used to build a weapon or fuel a nuclear power reactor.

Iran has said it's developing nuclear technology to generate electricity.

U.S. Gasoline Demand

The fewest Americans in three years likely traveled over the July 4th weekend as record gasoline prices and a slowing economy force consumers to curtail spending, according to AAA, the largest U.S. motoring group. The number of people taking trips of at least 50 miles (80 kilometers) from home over the holiday weekend will fall 1.3 percent to 40.5 million, AAA said.

The AAA survey marks the first time this decade travel was expected to decline over consecutive holidays, following a projected drop for Memorial Day in May.

The number of air travelers over July 4th will probably fall 2.3 percent to 4.5 million, AAA said.

Unrelated to Supply

Chakib Khelil, who heads the Organization of Petroleum Exporting Countries, said yesterday he doesn't expect prices to fall anytime soon because of ``big demand'' in India and China.

Record oil prices weren't related to supply and they have surged mostly because the ``U.S. Federal Reserve lowered interest rates to boost the American economy, which weakened the dollar,'' said Khelil, who is also Algeria's oil minister.

French President Nicolas Sarkozy said the leaders of the Group of Eight major industrial nations meeting in Japan should encourage oil-producing countries to boost output to prevent an oil-driven economic slowdown.

``Oil is over-priced relative to the other commodities but no one is calling the top,'' said John Lee, principal of Mau Capital Management, at a conference today in Singapore. ``The longer oil stays above $130 a barrel, the less likely it will drop below $100 a barrel.''

To contact the reporters on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net.