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Wed 17 Oct 2007 11:33 AM

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Oil eases after soaring above $88

Oil prices eases as traders take profits from rally triggered by fears of tighter supplies and Middle East tension.

Oil prices eased on Wednesday, as traders took profits from a roaring rally to a new peak above $88, fuelled by renewed investor appetite triggered by fears of tighter supplies this winter and Middle East tension.

The surge has taken prices into uncharted territory, nearing the inflation-adjusted peak of 1980 and sounding alarm bells in the US, where officials fear it will pile pressure on an economy already reeling from the subprime crisis.

After surging more than 10% in six straight days of gains, US crude fell 46 cents to $87.15 a barrel at 0651 GMT. Prices gained $1.48 on Tuesday and touched a new intra-day high of $88.20, their third record peak in a row. December Brent crude fell 50 cents to $83.05.

Mounting tension between Turkey and Kurdish separatists in northern Iraq has fuelled the latest rally, helping lure a fresh wave of speculative and long-term investor capital, but some analysts said a correction was in store soon.

"The market is still very much focused on the Turkey-Iraq tensions for the short-term but I believe it is overvalued by at least $10 and will probably come off within the week," said Makoto Takeda of Tokyo's Bansei Securities.

The Turkish parliament is expected on Wednesday to grant its troops permission to launch an attack inside Iraqi territory, despite international pressure not to.

The tensions are seen as dimming hopes for a recovery in Iraqi oil exports via Turkey, which have been sporadic since 2003, but traders say the greater fear is the risk of unsettling the Middle East region, which pumps a third of the world's oil.

Risks

The impact of the geopolitical risk was magnified by concerns that Opec's 500,000 barrels per day (bpd) output rise may be too little too late to maintain healthy supplies through the winter, with refiners revving up to meet peak demand.

"Even when they start pumping in November, it's not much, I'm surprised they're not coming under more pressure," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour.

US crude stocks are expected to rise another 900,000 barrels in weekly data due for release later on Wednesday, while distillate inventories - which include heating fuel - should ease by 400,000 barrels, a Reuters poll found.

The US Energy Information Administration (EIA) said on Tuesday the market needed additional Opec oil but officials of the producing group said they had heard no discussion about raising output beyond the 500,000 bpd agreed in September.

Opec blames speculators for driving up prices, and some traders concur, noting the flood of cash now chasing returns after the US Federal Reserve cut interest rates and added billions of dollars of temporary reserves to the banking system.

Unprecedented weakness in the US dollar has also pushed investors into commodities at the start of the fourth quarter, when some investors will have reviewed allocations.

Oil prices have more than quadrupled since 2002 on the back of surging demand from developing economies but remain below the inflation-adjusted peak around $90 a barrel struck a year after the Iranian Revolution in 1979. - Reuters

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