Oil prices drop; geopolitical issues and tight U.S. supplies still a concern

Oil prices fell Monday amid relief over last week's release of British sailors detained by Iran, but concerns over the tight demand-supply balance and other geopolitical issues supported prices.

Light, sweet crude for May delivery fell 44 cents to US$63.84 a barrel in midmorning Asian electronic trading on the New York Mercantile Exchange.

Oil prices rose more than US$5 a barrel - hitting six-month highs - after the March 23 detention of the 15 sailors and marines. The market immediately fell following their release Thursday, but markets were closed starting Friday for the long Easter weekend.

"Ahead of a long weekend, traders are more cautious and tend to take long positions," said Victor Shum, energy analyst with Purvin & Gertz in Singapore. "Monday's drop reflects a delayed market correction to their release."

Shum predicted a further drop but said prices were unlikely to return to the US$61-62 a barrel range where oil was trading before the Britons were captured.

He noted that gasoline supplies in the United States were tight and demand for crude oil would also pick up.

"Primarily, the market has found support in the fundamentals," Shum said. "Tightening fundamentals will help prevent prices from sliding too far."

Last week's annual report by the U.S. Energy Information Administration showed a larger-than-expected increase in gasoline supplies but lower refinery output. Many refineries have suffered unplanned outages in recent weeks, which has weakened demand for crude and reduced gasoline production.

Refinery problems in the U.S. have prompted traders in the physical market to look overseas - which, combined with increased demand in Europe, has driven the price of oil traded in London up over US$68 a barrel, higher than in New York.

Lingering geopolitical worries - upcoming elections in Nigeria that could spur further unrest, and Iran's nuclear issues - would also strengthen prices, Shum said.

In other Nymex trading Monday, natural gas fell 0.1 cent to US$7.606 per 1,000 cubic feet, and heating oil futures were down 0.34 cent to US$1.8575 a gallon.