Oil Prices Will Continue To Rise; OPEC Will Maximise Production & Exports.

*** Zarqawi's Death News, Which Hit NYMEX On June 8, Caused July WTI To Fall $1.72 To $69.10/B; But The Week Ended On June 9 With July WTI Closing At $71.64/B - On News That Iran Had Resumed U. Enrichment On June 6 - The Very Day The Big Powers Presented Tehran With A Package Of Sticks And Carrots To End The Stand-Off Diplomatically

*** Nigeria's Risk Factor Will Stay High At Least Until The 2007

Presidential Elections As The Shortage Of Light/Sweet Crude Oils Will Be Increasing Due To A Continuing Lack Of Capacity To Convert The Sour Grates Into Cleaner Fuels

*** RFG Retail Prices In USA May Rise Above $3.50/G In The Coming Two Months - SUVs Remain In Use

Strong demand, mainly in the US and China, has made crude oil prices above $70/barrel sustainable for weeks. Accounting for 40% of the world oil output, OPEC can only prevent a fall in prices for its basket of crudes below $50/b. It cannot control prices when they are above $50/b. So the June 2 decision of OPEC's ministerial meeting in Caracas to keep the group's official production ceiling of 28m b/d - excluding Iraq - unchanged will make no difference to a US consumer paying $2.9-3.10/gallon for reformulated gasoline (RFG) or to an energy-intensive industry in China forced to burn anything it can get.

Before a review of OPEC members' positions which may have some effect on the market (see following pages), it is important to focus on what will keep oil prices high: Five major hurricanes as powerful as last year's Hurricane Katrina, when it made landfall, are likely to form in the Atlantic this year, and there is an 82% chance that at least one will hit the US, forecasters at Colorado State University said recently.

The Atlantic storm season runs from June 1 through Nov. 30. If another couple of storms come through, especially early, there could be a big impact. There is going to be a fairly high floor on oil prices just because of that.

Then comes the geo-political factor: a combination of very fluid problems such as Iran's nuclear ambitions - with some experts still anticipating a US attack - high political risk in Saudi Arabia, Nigeria, Iraq (see News Service & OOD in this week's APS Diplomat Package).

OPEC members produce as much as the markets need. But Saudi Aramco in April was unable to produce more than 9.1m b/d, for lack of demand for its capacity of 11.3m b/d.

While the US Army Corps of Engineers scrambles to defend the Gulf Coast against hurricanes on land, IOCs are preparing to avoid the havoc which last year's big storms wreaked offshore. They are fortifying mobile platforms and drilling rigs, putting backup communications systems in place, and working out advance contracts with tug and helicopter services. But a manpower shortage is hampering these efforts.

The shortage is so acute that many companies are still working on last year's equipment failures. Nine months after hurricanes Katrina and Rita moved through, 21% of the Gulf of Mexico's crude oil output and 13% of its natural gas production remain offline.

Even more disconcerting to consumers is that crude oil and natural gas prices could rise even higher if another strong storm hits the Gulf. While last year's hurricane season destroyed 113 offshore facilities and damaged 53 others, the most problematic were jack-up rigs and mobile drilling units, says the Minerals Management Service (MMS), which regulates the industry in federal waters.

So along with the US Department of Energy and API, the industry's primary trade association, the offshore industry just adopted recommended practices for these more vulnerable structures in time for the coming hurricane season. Fortifications to jack-up structures are largely complete, but modifications to floating structures are a third done.

US oil firms always take the hurricane season seriously, but even more advance planning will be necessary with the busy forecast in coming years, says Tim Sampson, co-ordinator for drilling and production operations with API. Predictions are for as many as 16 named tropical storms this season, with four to six forming into Category 3 hurricanes or higher.

The Gulf of Mexico produces 30% of the US' crude oil and 21% of its natural gas, so a major hurricane can have a severe effect on prices. Last August/September, US RFG prices rose above $3/gallon - at one time they hit $6/g in some places - with natural gas prices jumping as well. In addition, there is a big challenge in moving employees inland and shutting down drilling operations. Companies face having damaged platforms or drilling rigs out of operation for months.

The Christian Science Monitor on June 6 quoted Allan Pulsipher, head of the Centre for Energy Studies at Louisiana State University in Baton Rouge, as saying: "I don't think there are any lackadaisical attitudes this hurricane season. Oil companies have a tremendous financial incentive to learn what lessons they can from last year's hurricane season. These structures are billion-dollar investments, and they don't want to see them upside down in the water".

Part of the problem, says Jim Hooper, an engineer and oil industry consultant in Houston, is that the industry as a whole is so short of workers right now that many firms are still working to fix last year's equipment failures. But companies make every effort to ensure that production comes back quickly, says Sampson of API, adding: "These companies are in the business of producing oil and gas, and every day they are not is costing them money".

Chevron, which has a large presence in the Gulf, is adding structural bracing to several platforms and raising the height of critical production equipment on others. The major has obtained more backup office space and equipment in case onshore operations have to be moved, and increased the amount of temporary housing for the 3,000 employees it has in the Gulf at any one time. The Monitor quoted company spokesman Mickey Driver as saying: "Chevron has been working in the Gulf of Mexico for 60 years and we have a tremendous amount of experience with hurricanes. But we learned a lot last year about what to do onshore as well as offshore".

Houston-based Trans-ocean, the world's largest offshore driller, is trying to better ensure that its equipment will still be there when the storm passes. On two of its deep-water rigs, the company is expanding the mooring facility from the traditional eight-point system to a 12-point one - hoping to better secure them in place. Both were knocked off location last season and had to be tracked down using the onboard GPS systems.

Some companies say even that is not enough, and they are putting more than one GPS system on board this hurricane season. But of the more than 4,000 platforms in the Gulf, the majority of those damaged were built before 1988, when stricter construction standards were put in place. They remain the most vulnerable. Hooper said: "For the most part, the new platforms were built to handle what hit them" (with the exception of Shell's massive Mars platform, which accounts for about 5% of Gulf oil and gas production. It only resumed limited operations recently).

Perhaps even more susceptible are the pipelines which run along the sea floor. Currents can easily break them. Some even washed up on shore during the last hurricane season.

If New Orleans had not flooded, Dr. Pulsipher believes the big story would have been the significant onshore oil spills caused by the hurricanes. He said: "Hurricanes have no doubt been a contributing factor to higher gasoline prices in the United States. But keep in mind that this was a tremendous hurricane season. It's remarkable that as many remained operable as they did".