Traders focus on production news from StatoilHydro and on Saudi Arabia

By Myra P. Saefong & Polya Lesova, MarketWatch, Last Update: 3:31 PM ET Jun 16, 2008

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed modestly lower Monday, marking a steep decline from the session's record high near $140 a barrel as traders weighed support from the temporary shutdown of an oil platform in the North Sea and weakness in the U.S. dollar against pressure from reports that Saudi Arabia plans to raise its output next month.

Crude for July delivery hit a record high of $139.89 a barrel in electronic trading on Globex. The July contract, which expires on Friday, closed 25 cents lower at $134.61 a barrel in regular trading on the New York Mercantile Exchange.

Prices continued to fall in electronic trading late Monday afternoon. July crude was trading below $134 on Globex as of 3 p.m. Eastern time.

Options on the contract expire on Tuesday, adding to the market volatility. Oil futures earlier Monday hit an intraday low of $132.84 a barrel in electronic trading. Last week, crude futures posted a weekly loss of 2.7%.

Part of the retreat in oil prices was "likely realization" that the StatoilHydro ASA (STO) fire was a "relatively easy-to-repair electrical problem," said James Williams, an economist at WTRG Economics, in emailed comments. "This market always overreacts to the smallest piece of bad news."

Norwegian oil company StatoilHydro said Sunday that it shut down oil production at a North Sea platform after a fire broke out. The company said that the fire was quickly extinguished on the Oseberg A platform and no one was injured during the incident.

StatoilHydro didn't say specifically what caused the fire, but said it occurred in a high voltage room. The company said that total oil production shut down due to the incident amounted to 150,000 barrels per day.

The company has since said that production on the Brage and Veslefrikk fields have been resumed. Oil from those fields was transported via the Oseberg field center.

Meanwhile, reports Monday suggested that Saudi Arabia, the world's leading oil exporter, is planning to raise oil output.

The New York Times reported Saturday, citing analysts and oil traders briefed by Saudi officials, that the kingdom plans to increase its production next month by about 500,000 barrels a day. That would bring Saudi output to 10 million barrels a day, which would be its highest ever if it is sustained, the Times reported.

Separately, the United Nations said Sunday that Saudi Arabia will increase its output by 200,000 barrels a day next month, the BBC reported. The news came after a meeting between U.N. Secretary General Ban Ki-Moon and Saudi Oil Minister Ali al-Naimi, the BBC reported.

Reuters reported that Saudi Arabia plans to lift its output to 9.7 million barrels per day in July. The news agency cited Sunday's comments from Ki-Moon, following a meeting with Saudi Oil Minister Ali al-Naimi. His comments were quoted in the Abu Dhabi-based The National newspaper, Reuters said.

"Officially, it seems the Saudis have not made a decision on the final number," said Edward Meir, an analyst at MF Global, in a research note Monday.

Reports of a Saudi output increase of 200,000 barrels per day effective in July is "not enough to move markets," said WTRG's Williams. "This is probably not the final move."

"The Saudis, fearing a price collapse, have taken a gradual approach to the problem," he said. "It is increasingly evident that a dramatic move is necessary."

And there are several moves the Saudis could make at the planned meeting on June 22 between oil producers and consumers, he said.

They could "direct intervention in the futures market shorting large volumes of oil," said Williams. They could also "increase production by another 500,000 barrels per day over the 200,000 barrels per day already announced."

Taking that strategy would likely prove that the Saudis can produce that volume of oil and the oil would show up in the Energy Department's weekly supply data and probably influence prices, he said. Also, the oil shipped could be lower quality heavy sour oil since the Energy Department does not distinguish between grades, he said.

The rally seen earlier in Monday's session was driven by headlines, said Darin Newsom, DTN senior analyst.

"The underlying fundamentals don't support the market ... so once the buying loses momentum, the market has to fall back to try to find commercial support," he said in emailed comments.

Meanwhile, "the weakness of the dollar continues to provide support to commodities in general," he said.

On the currency markets Monday, the dollar traded mostly lower. The dollar index (DXY) , which tracks the performance of the greenback against a basket of other major currencies, fell 0.6% to 73.597. See Currencies.

Weakness in the greenback typically boosts dollar-denominated commodities such as crude oil and gold.

"We also cannot look over the fact that China, for the first time, has become a net importer of gasoline," Zachary Oxman, a senior trader at Wisdom Financial, said in emailed comments. "Add that to a weak dollar and a huge rally again in commodities and you have crude pushing towards $150, which I think we will see inside of one month if this trend continues."

China's May gasoline imports rose to a record 338,572 tons, making the country a net importer for the first time on record, according to media reports.

U.S. retail prices for regular gasoline climbed to another record Monday of $4.08 a gallon, according to AAA's Daily Fuel Gauge Report. It's up 35.6% from a year ago.

But July reformulated gasoline was down 2 cents at $3.44 a gallon after climbing as high as $3.53 earlier, while July heating oil rose 7 cents at $3.9056 a gallon.

Natural-gas futures were the lone winner among the energy futures Monday. July natural gas futures gained 30.3 cents to close at $12.933 per million British thermal units.

"Last week's surprisingly low injections -- 80 billion cubic feet against expectations of 94 BCF -- has heightened concern about rebuilding [supply] for winter," said Michael Fitzpatrick, an analyst at MF Global, in a note to clients. "The two major worries that are foremost in participants' minds are a hot summer and storm activity."

Rounding out Monday's trading, energy equities climbed. The Philadelphia Oil Service Index (OSX) was up 0.7% at 340.71. See Energy Stocks.

Prices for gold futures rallied to touch a high of $897 an ounce. See Metals Stocks.