Market watch, June 21

Unconfirmed rumors that OPEC ministers might increase production only half as much as previously speculated triggered a strong rebound in world oil futures prices Tuesday.

Unconfirmed rumors that OPEC ministers might increase production only half as much as previously speculated triggered a strong rebound in world oil futures prices Tuesday.

Saudi Oil Minister Ali al-Naimi said Wednesday that cartel members have agreed informally to boost production starting in July, but he declined to give details. Another senior OPEC source, speaking on condition of anonymity, said the increase would be 700,000 b/d, starting in July.

On the New York Mercantile Exchange (NYMEX), the July contract for the benchmark blend of light sweet crudes shot up $1.36 to close at $33.05/bbl. Tuesday was the last trading day for that contract, which added to the volatility.

The August contract also gained $1.01 to $30.65/bbl. In after-hours electronic trading Tuesday, that contract inched up to $30.67/bbl, with the September contract fetching $29.40/bbl.

Oil traders were reacting to rumors that OPEC oil ministers meeting Wednesday in Vienna may increase their combined oil production by only 500,000 b/d�the amount favored by Venezuela and Iran�rather than 900,000 b/d, the amount proposed by Saudi Arabia and others.

A production increase of nearly 1 million b/d would bring oil prices back down to the $25/bbl level, which would satisfy both producers and major importers like the United States, analysts said.

"We think that a good stable price of $25 for Brent (the North Sea benchmark) is the best price," said Algerian Oil Minister Chakib Khelil.

The price of Brent crude has slipped recently in anticipation of a production hike by OPEC members. But on Tuesday, Brent gained $1.04 to $29.02/bbl on the International Petroleum Exchange (IPE) in London.

By Wednesday, the August contract for Brent was trading at $28.70/bbl on the IPE, down 32� from Tuesday's close.

The average price for OPEC's basket of seven crudes was up $1 to $28.97/bbl Tuesday.

Some observers say that a 500,000 b/d increase would simply bring the OPEC quota in line with its current total production level as a result of cheating by some members of the cartel. The effect, they say, would be the same as a 1 million b/d increase, as the cheats again overproduce their quotas.

Meanwhile, a labor dispute still threatens to shut down Norway's offshore production by midnight Friday. Although not an OPEC member, Norway is currently the second largest oil exporter after Saudi Arabia and has worked closely with OPEC members on production decisions in recent years.

However, perception often outweighs reality in world oil markets, and any decision by OPEC will trigger a kneejerk reaction by traders. Analysts are expecting world oil markets to decline Wednesday because of the sharp rise in prices Tuesday.

Natural gas futures were up 4.4� to $4.12/Mcf on the NYMEX. On the IPE, the July natural gas contract gained 3� to the equivalent of $2.51/Mcf.

The July contract for home heating oil was up 2.57� to 76.13�/gal Tuesday on the NYMEX, while unleaded gasoline was unchanged at $1.0526/gal.

The Federal Trade Commission has launched an investigation into possible price gouging by refiners in the wake of rising gasoline pump prices in excess of $2/gal in the US Midwest. Illinois congressmen said Tuesday that the FTC will issue subpoenas as early as next week to oil companies suspected of collusion.

Industry officials blame the price spike on a Michigan pipeline problem and new federal rules mandating a switch to reformulated gasoline on June 1. The Clinton administration continues to deny that its push for cleaner-burning gasoline is a factor in the price increase, since that could negatively impact Al Gore's presidential campaign.

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