Oil prices slipped yesterday from highs touched after the death of Saudi Arabia's King Fahd, but nagging fears about the stability of Middle Eastern supplies cushioned the fall.
US light sweet crude for September delivery fell 31 cents to $61.26 barrel, after leaping well over a dollar to a peak of $62.30 a day earlier. London Brent crude lost 40 cents to $60.04 a barrel, after also jumping to a record high of $60.98 on Monday.
Product prices also weakened ahead of the next set of US inventory data today, which was expected to show another rise in distillate stocks, including diesel and heating oil.
Concerns about fuel shortages have played a big role in driving current price strength, which has hurt economic growth prospects, although Monday's records in real terms are still far below the all-time peak of nearly $100 set in the 19th century.
According to figures from BP, the all-time record taking into account inflation was $97.79 for the average price of US crude. It was hit in 1864 when the Pennsylvania oil boom drove prices to $8.06 in the money of the day.
King Fahd's death on Monday sparked the latest surge to new peaks, even though his successor Crown Prince Abdullah has been de facto ruler of the kingdom since King Fahd suffered a stroke in 1995 and he is not expected to change oil or foreign policies.
Saudi Arabia, the leading member of the Opec cartel, is pumping about 9.5 million barrels per day (bpd) of crude and has vowed to keep spare production capacity of 1.5 million to 2.0 million bpd to meet any supply shortfalls.
Yet there were fears King Fahd's death might stir an era of uncertainty over Saudi Arabia's longer-term policies as the new king is more than 80 years old, opening the way for a succession struggle between conservatives and reformers.
"(King Fahd's death) was a catalyst for some people to look more closely at the family than perhaps they did and they realised the new king is 83," said Mark Keenan of MPC Commodity Fund in London.
Worries over US policy towards Iran provided some long-term support for oil after Tehran, in defiance of EU warnings, said on Monday it had begun preparations to resume nuclear work that the West suspected could help it build an atom bomb. But analysts said the market had yet to focus on the issue.
"People realise there is a whole script that has to play out which will take months and months," said Michael Wittner, global head of energy market research at Calyon.
Political worries in the Middle East underscored the fragility of the global supply system at a time when US demand is growing strongly, testing refiners' ability to supply enough fuels. US inventory data today will be closely watched.
Analysts forecast a one million barrel fall in crude inventories, a 1.8 million barrel increase in distillate stocks and an 800,000 barrel fall in gasoline stockpiles.
Traders said the decrease in crude stocks was unlikely to worry the markets unduly, given that supplies of crude have been swollen by the highest Opec output for a quarter of a century. If confirmed, the expected increase in distillate stocks would be the 11th increase in a row, and would further soothe worries that high demand could deplete inventories.
In its most recent report, the United States' Energy Information Administration said US gasoline demand was up 1.6 per cent in the past month, while distillate demand was up 3.6 per cent.