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Mon 22 Oct 2007 12:15 PM

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Tensions in Kurdish Iraq keep oil at $88

Oil prices extend decline, but cling to $88 on Turkey-Kurd violence and record-low dollar.

Oil prices fell on Monday, extending the previous session's decline on profit taking from record highs, but clung to $88 on violence between Turkish soldiers and Kurdish guerrillas and a record-low dollar.

US light crude for November delivery, which expires later on Monday, fell 60 cents to $88.00 a barrel in Globex electronic trading by 0641 GMT. US oil settled 87 cents lower at $88.60 a barrel on Friday, after touching an all-time high of $90.07 earlier.

The December contract dropped 61 cents to $86.34, after falling to as low as $85.89. London Brent crude for December fell 38 cents to $83.41 a barrel.

Analysts said oil's decline came as a surprise as news over the weekend was mostly bullish.

"A possible explanation could be more profit taking or that investors are adopting a more cautious view about how tight the market will be in winter in the northern hemisphere," said David Moore, a commodities analyst at the Commonwealth Bank of Australia.

US oil, which has rallied more than 10% since October 8, has averaged just over $67 a barrel this year and is climbing towards the inflation-adjusted high of $101.70 hit in April 1980, a year after the Iranian revolution.

The weakening dollar and surging energy costs have increased worries over the health of the US economy, already battered by the crisis in the subprime mortgage sector.

Despite oil's slide since Friday's all-time high, analysts said mounting tensions between Turkey and Kurdish rebels in northern Iraq would continue to offer underlying support and keep prices close to record territory.

Turkey vowed on Sunday to take tough action after Kurdish guerrillas killed 17 of its soldiers, but said Washington had asked it to hold back for a few days more from sending troops to the rebels' hideouts in northern Iraq.

Weak dollar, geopolitics

Kuwait's acting oil minister said on Monday that geopolitics and a lack of refining capacity was behind a surge in world oil prices and that a 500,000 barrels per day (bpd) increase agreed by Opec would positively affect the market.

"We think that the production rise by 500,000 bpd will affect positively [the price]," Mohammad Al-Olaim told reporters on the sidelines of an oil conference.

"It is in our interest that the price is appropriate for consumers and producers."

A weakening US dollar would also keep oil prices on the boil. The dollar sank to fresh lows against major currencies on Monday, while the yen surged after a meeting of industrialised powers ended with no words of support for the beleaguered dollar, offering a green light to speculative sellers.

News of Iran's chief nuclear negotiator resigning has also raised concerns of more instability in the Middle East.

Analysts said the man named to replace Ali Larijani could present the West with a harder line in a long-running dispute over Tehran's atomic ambitions.

Saturday's announcement exposed a rift over tactics with Iranian President Mahmoud Ahmadinejad, who accepted Larijani's resignation and has taken an uncompromising approach in the nuclear stand-off. - Reuters

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