Oil Prices Drop Below $40 a Barrel on OPEC Promises

U.S. oil prices shed more than two dollars a barrel to end under $40 on Wednesday — only a day after hitting a 21-year high — as the prospect of more OPEC crude coming to the market eased supply security fears sparked by a wave of violence in Saudi Arabia.

"Crude oil prices retreated from the highs as the shock of Saturday's attack in Khobar, Saudi Arabia, subsides, allowing the focus to shift back to a less emotional reading of the underlying fundamentals," said Tim Evans, senior energy market analyst at IFR Energy Services in New York.

Benchmark July U.S. light crude (search) ended sharply lower at $39.96 a barrel, or 5.6 percent down, as traders took profits from the record high of $42.45 a barrel touched during after-hours electronic trading overnight.

London Brent crude (search) lost $2.22 a barrel to $36.86, also 5.6 percent lower.

The fall in U.S. crude nearly erased Tuesday's six percent surge in U.S. crude as the market raced up after the weekend's deadly attack in the Saudi oil city of Khobar. The attack heightened concerns over the ability of the world's largest oil exporter to contain a spate of Islamic militant violence.

Traders said the promise of more oil from OPEC ministers ahead of Thursday's cartel meeting had encouraged profit taking from Tuesday's surge, although the supply security risk premium still remained.

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Saudi Oil Minister Ali al-Naimi, who has already promised an extra 700,000-800,000 bpd of crude for June whatever OPEC decides, backed a 2.5 million bpd or 11 percent increase in the cartel's official output limits Wednesday,

The United Arab Emirates, the only OPEC member along with Saudi Arabia with any significant spare capacity, said on Wednesday it would lift real output in June by 400,000 bpd.

OPEC is already pumping more than two million bpd above its existing official ceiling of 23.5 million bpd, and some ministers said there may be little more they can do to quell the surge in prices, which threatens global economic growth.

Saudi Arabian officials in Washington also sought to calm those fears. Adel Al-Jubeir, foreign adviser to the Saudi royal family, said the kingdom is determined to help ease world oil prices by working with other OPEC nations to provide ample supply.

Market participants fear the Khobar attack could mark the start of a concerted al Qaeda offensive to disrupt Saudi supplies at a time when oil prices are already high enough to threaten world economic growth.

"Looking at the current supply and demand balance, crude prices should be trading around $30 to $35," said Kurt Hallead, managing director at RBC Capital Markets Corp in Texas. "At $40 a barrel, the security risk premium is now as much as $10."

Kuwait said it was stepping up security at its oil installations and was coordinating with fellow Gulf producers to protect against attacks.

Riyadh has vowed to keep supplies running smoothly from its heavily guarded oil facilities.

Algeria's energy minister Chakib Khelil called for a complete suspension of output quotas, saying it was the only way to make an impact on the market.

"Possibly the most drastic action OPEC could take would be to suspend quota levels altogether. We think that unlikely, but even this kind of move may not be enough to push prices down by much in the short-term, given the level of political uncertainty in the Gulf region at present," wrote Kevin Norrish of Barclays Capital.