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    News & Views

    Crude oil prices in Asia drop sharply overnight, product prices may follow

    SINGAPORE (Reuters) - Crude oil prices in Asia were close to 10-year lows on Tuesday, following a sharp drop in overnight prices.

    The fall was likely to ease the pressure on refinery margins -- the difference between crude and product prices -- but analysts said they expected products to catch up with crude's fall soon.

    September Brent crude futures on the International Petroleum Exchange (IPE) in London settled at $11.91 per barrel on Monday, after falling 68 cents. In New York, West Texas Intermediate (WTI) crude futures fell 75 cents to $13.05.

    By Tuesday in Asia, prices appeared to steady. September Brent on the Singapore International Monetary Exchange (SIMEX) was quoted at $11.85 per barrel around mid-morning.

    The current Brent level is only slightly higher than the 10-year low level of $11.90 touched in March, which sparked the first round of output cuts by global oil producers.

    Traders said the overnight fall was triggered by an International Energy Agency (IEA) report which showed that OPEC production in July failed to match cuts pledged by the group to help bolster oil prices.

    "It (crude price) was off on the news that OPEC has come nowhere close to achieving their cuts, they've only cut about half," said Matt Sims, a broker with ED&F Man in New York. "The tension in Iraq is far outweighed by the fact that OPEC is far off on its cuts," he said. The IEA said OPEC output in July fell to 27.81 million barrels-per-day (bpd), from a revised 28.17 million bpd in June.

    Analysts said the production only met 55 percent of the pledged cuts for the month. They expected better compliance in August, but said production was still far too high to reduce bloated stocks.

    "Our view is that we need OPEC to cut to levels below 27 million bpd before we can see any meaningful recovery in oil prices," said James Brown, energy analyst with Merrill Lynch.

    The sharp drop in crude prices offered temporary relief to the depressed profit margins of Asian refiners. But at the same time, analysts said the relief would be short lived.

    They said product weakness in Asia was possibly a stronger factor than crude in terms of market sentiment.

    "The only way that companies' margins can improve is if crude prices remain low and product prices remain steady and that's irrational because the oversupply situation in the products would mean that prices of those products will come down also," said Bill Hunsaker, energy analyst at ING Baring.

    "We've seen now that the weakness in the product market is having a bigger impact on the short-term market than the supply of crude," said John Russel, managing director of Bangkok-based Petroleum Economics Limited. "The fall in crude prices to a large extent, even if not immediately, will be matched by the weakness in products," he said.

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