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Crude prices level off after week-long rally

Oil prices leveled off yesterday after the effects of OPEC production cuts and a massive US government buying spree led to a weeklong rally.

Benchmark crude for April delivery fell 55 cents to settle at US$51.06 a barrel in light trading on the New York Mercantile Exchange. The April contract expires yesterday and traders shifted their attention to the May contract, which rose 3 cents to settle at US$52.07.

It was the first time crude has ended the week above US$50 since last year.

"It really seems like the market is taking a breather after a wild week," said Mike Zarembski, senior commodity analyst at brokerage OptionsXpress Inc.

Oil prices rose 11 percent over the week. Prices spiked after the US Federal Reserve announced plans Wednesday to buy US$1.25 trillion of government bonds and mortgage-backed securities. Investors pumped money into commodities like oil as the dollar went into a tailspin.

Also this week, for the first time in months, supply concerns came to the forefront as researchers that monitor seagoing oil tankers said traffic had dropped considerably.

Investors since late last summer have brushed off OPEC's plan to slash crude production, focusing instead on the global recession and a massive surplus of crude in US inventories.

But six months after OPEC members agreed to tighten their spigots, analysts said the group has started to balance a plunge in global consumption with supply. Most analysts believe the Organization of Petroleum Exporting Countries has cut about 80 percent of the 4.2 million barrels of crude per day that it promised last year.

OPEC ministors said Sunday they would push even harder to make all member states comply with quotas.

Crude prices rose again yesterday as traders learned that two US Navy vessels collided in the Strait of Hormuz between Oman and Iran, a crucial passageway for supertankers.

The collision would not block the waterway, but any incident in that area can spook markets.

The US Navy's 5th Fleet said the collision occurred between the USS Hartford, a submarine, and the USS New Orleans.

Fifteen soldiers aboard the Hartford were slightly injured but able to return to duty.

"Whenever we see something going on in that area, we always see an uptick in prices," said Addison Armstrong, director of market research at Tradition Energy. "It's a very narrow area. It's choked with ships. And it's in a volatile region."

About 17 million barrels of oil moved through the narrow straight in the first half of last year, roughly 40 percent of the crude that's traded at sea, according to the Energy Information Administration. At its narrowest, the strait measures 21 miles (33.5 kilometers) across and forms a bottleneck for ships trying to get in and out of the Persian Gulf.

Also yesterday, analysts with Morgan Stanley said a sharp drop-off in deep water drilling projects could cut crude supplies by another 2.4 million barrels a day in 2011.

In other Nymex trading, gasoline for April delivery rose almost 2 cents to settle at US$1.457 a gallon. Heating oil also rose 2.7 cents to settle at 1.3834 a gallon. Natural gas for April delivery rose 5.3 cents to settle atUS$4.227 per 1,000 cubic feet.

In London, Brent prices rose 55 cents to settle at US$51.22 on the ICE Futures exchange.


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