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Oil at $41, demand hits 20-year high

U.S. oil prices held firm near $41 Friday as the most robust demand growth in more than two decades pushes OPEC to pump crude at near capacity.

World supplies are vulnerable to the slightest production hiccups.

U.S. light crude for August delivery rose 18 cents to $40.95 a barrel, just a hair away from a six-week high of $41.12 touched on Wednesday. And prices are near June's $42.45 peak, a record for the contract's 21-year history.

August London Brent was up 29 cents at $37.77 a barrel, buoyed by an exceptionally strong cash crude market in the North Sea.

Gains were spurred this week by an unexpected decline in U.S. crude and gasoline inventories, plus worries that heating oil supplies are not being built up quickly enough ahead of the winter.

The U.S. oil data added to fears over supply disruptions at a time when output capacity was being stretched by rapidly growing demand -- estimated to be expanding at 2.5 million barrels per day (bpd) this year, its fastest clip in 24 years, according to the International Energy Agency (IEA).

The Organization of the Petroleum Exporting Countries (OPEC) is proceeding with its planned output ceiling hike of 500,000 bpd from August 1 in an effort to cool prices, but it looks unlikely to mean more crude.

The group, which controls around half the world's oil exports, is already pumping nearly 2 million bpd over its new 26 million bpd August quota, very near the its maximum capacity.

With little to discuss, the cartel cancelled next week's planned ministerial meeting. It will next meet September 15.

"The cartel perhaps concluded that aside from the Saudis, the rest of the group is pretty much tapped out in terms of exports," said Ed Meir, analyst at brokers Man Financial. "Therefore, having a meeting to discuss more 'phantom' quota increases would be of little use."

Kuwait said Thursday it had spare oil production capacity of almost 100,000 bpd, while Saudi Arabia, which has been producing around 9.1 million bpd, has the capacity to crank it up to 10.5 million bpd.

"The meeting is cancelled because the market is stable. There is no problem at the moment because the decision to increase 500,000 bpd from August 1 is in place," OPEC president Purnomo Yusgiantoro told Reuters on Friday.
Heating oil worries

Distillate supplies in the United States, where the Northeast region is a major winter consumer of heating oil, have emerged as an early driver for the energy complex as dealers fretted over the pace of pre-winter inventory building.

Heating oil futures reached an 18-month high of $1.1080 a gallon this week, the strongest on record for July, when gasoline is typically the market's strongest product. On Friday, it was trading up 22 points at $1.1008.

Seeking to avoid panic buying, the U.S. government Energy Information Administration (EIA) said Thursday there was plenty of time to boost heating oil inventories before the winter heating season arrives, so traders should not bid up fuel prices.

It's much too early to worry about heating fuel supplies, EIA administrator Guy Caruso told reporters.

This week's EIA data reported a significant buildup of 2.7 million barrels in middle distillate inventories for the week ended July 9, putting them 3 percent above this time last year.

Caruso conceded that the United States came out of the spring with relatively low heating oil stocks, but added that if crude imports continued to average 10 million bpd and there were no major refinery outages, heating oil stocks should be in the "normal zone" by November.

Still, analysts said that while stock levels looked comfortable on the surface, rapid economic growth could place more demands on inventories than in previous years.

Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo, said fund speculators would remain on the buy side of the market on persistent fears of disruptions to crude flows in Iraq and possible refinery outages in the United States.

"There are no bearish factors in the market. Already we are over $40 and there is still room to move higher," he said.

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