Oil Falls in Wake of 'Al Qaeda in Iraq' Leader's Death

LONDON – Oil prices were down Thursday after the announcement of the death of Al Qaeda leader in Iraq, Abu Musab al-Zarqawi.

"This is very good news in the war against terror, and just as bad news has had a negative impact in terms of the oil markets, sending prices up, this should have an immediate positive impact," former Energy Secretary Spencer Abraham told FOX News on Thursday.

Light sweet crude for July delivery fell 47 cents to settle at $70.35 a barrel on the New York Mercantile Exchange. The last time Nymex oil futures settled below $70 was on May 24. Nymex gasoline futures fell by 2.18 cents to finish at $2.1022 a gallon.

In London, July Brent crude futures on the ICE Futures exchange fell 77 cents to $68.42 a barrel.

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"In fact, I saw some already today on the exchanges. It will balance back if there are some reprisal attacks, but I think really the important thing is the combination of the events in Canada in the past week, plus this. I think it will begin to give the market some confidence that in a long-term sense, the War on Terror is being won, slowly but surely, and certainly a big part of the high oil prices we see today is the result of fear in the marketplace."

Abraham was referring to 17 arrests made in Canada earlier this week of men authorities say plotted to storm the Parliament building in Ottawa, take politicians hostage and behead them if the government did not pull its 2,300 troops out of Afghanistan and release Muslim political prisoners.

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Word by Nigerian militants that they would release foreign hostages and an easing of world tensions over Iran contributed to the decline in oil prices, which dipped by 2 percent on Wednesday after U.S. data showed rising crude and gasoline supplies.

Analysts cautioned against reading too much into the killing of Zarqawi, who was a key ally to Usama bin Laden and a terror mastermind behind the insurgent attacks in war-torn Iraq. He claimed responsibility for a foiled suicide boat attack on Iraq's vital Basra oil terminal in April 2004.

"I think this particular individual has come to symbolize so much of the disruption, so much of the death, you know, really that I don't think anybody else can substitute. So I do think there will be a collective sigh of relief among most of the people in Iraq and that's good news there in terms of the energy markets, it can have a good news effect, both immediately as we're seeing today," Abraham said. "But, again, in a long-term sense, if there's a greater view in the marketplace that the war against terror is being won and the threat from terrorists is being diminished."

Al Qaeda in Iraq vowed on Thursday to continue to fight.

"The end of Zarqawi will not be the end of threats to oil exports in Iraq," said Mustafa Alani, an Iraq expert at the Gulf Research Council in Dubai.

John Kemp, oil analyst at Sempra, agreed Iraq's oil sector, hobbled by decades of war, sanctions and underinvestment, may derive little benefit from Zarqawi's demise.

"Zarqawi's termination is a very big propaganda coup for the coalition, but I don't think it's going to have much impact on the ground. It isn't that significant from an oil market perspective," Kemp said.

SGCIB oil analyst Deborah White said the drop in oil prices on Thursday was almost entirely "the Zarqawi effect."

"This essentially means that the market is pricing in that Iraqi security will improve and so production can go back from say 1.85 million barrels a day to 2 or even 2.2 million bpd."

Markets were split on how to interpret the latest comments from Iranian President Mahmoud Ahmadinejad, who said this week that the Islamic state would "talk about mutual concerns and solving misunderstandings in the international arena."

The president's televised remarks came a day after Oil Minister Kazem Vaziri-Hamaneh said Iran could still use its oil exports for leverage in the dispute over its nuclear program.

Iran says it wants to develop nuclear power but the United States accuses it of harboring weapons ambitions and has demanded it stop enriching uranium.

Signs of slowing demand growth in the world's biggest energy user the United States is slowly creating a sense among some producers that oil prices may have reached their peak.

OPEC President Edmund Daukoru told Reuters on Wednesday that accelerating inflation would likely feed through to higher interest rates, hurting demand for oil.

At the same time, former Federal Reserve Chairman Alan Greenspan said high oil prices were starting to have an impact on the U.S. economy.

And U.S. oil stocks data showed crude inventories unexpectedly rose last week while gasoline consumption eased.

FOXNews.com's Christina Cuesta, Reuters and The Associated Press contributed to this story.