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Crude oil falls after Iran, OPEC pledge additional supplies

London, March 29 (Bloomberg) -- Crude oil dropped almost 5 percent to its lowest price in more than two months after Iran said it will increase output, adding to extra oil supplies pledged by other OPEC countries yesterday.

More oil from the world's biggest exporters means prices could fall in the coming months, traders said. That would help boost earnings for companies such as chemical makers and airlines British Airways Plc and KLM Royal Dutch Airlines NV."Anything that leads to a lower fuel price will be very welcome to the whole industry," said Peter Wellhuner, a spokesman for KLM.

Crude oil for May settlement fell as much as $1.26, or 4.9 percent, to $24.25 a barrel on the International Petroleum Exchange, its lowest price since Jan. 12.

Iran, the second-biggest producer in the Organization of Petroleum Exporting Countries, isn't participating in a 6 percent supply increase OPEC announced yesterday. The country said it will increase production to ensure it doesn't lose business when other producers raise output.

"We will not lose market share," Oil Minister Bijan Namdar Zanganeh said, implying that the Iranian increase could approach the 264,000 barrels of daily supply it would have added to world supplies had it joined the OPEC agreement.

Traders said Iran could try to increase output more than the amount it was slated to in the OPEC accord.

"Iran will start with an amount that OPEC offered them yesterday and will continue" increasing production, said Tim Noest, a trader with ADM Investor Services International Ltd.

OPEC yesterday agreed to raise production by 1.45 million barrels a day. The group may increase output again in June if prices rise to $30 a barrel, Saudi Oil Minister Ali al-Naimi said today. OPEC will try to manage supplies to keep oil within a $20-to-$25-a-barrel range, he said. Iran can add about 300,000 barrels a day to that amount, traders and analysts said.

"The idea is to smooth the price gyrations and big swings," al-Naimi said. "We are not going to be trigger-happy if prices go out of this range for a day or a week."


The non-OPEC nations, such as Norway, who joined in the program agreed a year ago could also raise production, al-Naimi said. Iraq, which is in OPEC, isn't part of the pact.

Iran's dissent may be seen as a sign of growing division among the group, whose cutbacks last year sent prices surging to nine-year highs this month.

"The market is likely to carry on trending lower," said Lawrence Eagles, a commodities analyst at GNI Ltd. "Saudi Arabia sent a very strong message that it doesn't matter what the hard-liners do--it will ensure that the world is adequately supplied."

The effort to boost oil supplies won't be supported by Russia, the world's third-biggest producer. The country's fuel and energy ministry has said Russia will cut exports this year by 7.8 percent, even though its oil output is expected to rise 1 percent, to ensure oil deliveries to domestic refineries and keep domestic fuel prices low.

Jet Fuel

Oil prices in London more than doubled in 1999, fueling losses at airlines such as KLM by increasing the price of crude oil products such as jet fuel. The average spot price of jet fuel in the three months ended Dec. 31 was 68 cents a gallon, 75 percent more than in the same period a year earlier.

The agreement by nine of the 11 members of OPEC, which produces 40 percent of the world's oil, still falls short of the 2.3 million barrels that the International Energy Agency estimates is needed to return oil inventories to levels seen during much of the past decade.

The IEA today welcomed the increase in output as a "step in the right direction" though added that the extra supply won't be enough to meet additional demand later this year.

Iran, which has been one of the most vocal opponents of raising output, stayed out of the agreement because it wanted supplies to increase by less than 1.2 million barrels a day. It also objected to intense lobbying from politicians in consuming nations, such as U.S. Energy Secretary Bill Richardson.

"This is not just a disagreement on production, this is a disagreement on principles," said Hossein Kazempour Ardebili, Iran's OPEC governor. Consuming nations "should have welcomed our effort without intervention."

A boost of 1.45 million barrels a day would put the combined quota for nine OPEC members participating in the agreement at 21.1 million barrels a day, up from 19.6 million. Iran's previous quota was 3.36 million barrels a day.

OPEC said it will meet June 21 to review its production.