The oil market is already suffering a shortage of oil -

www.middle-east-online.com First Published 2003-01-27, Last Updated 2003-01-27 13:18:43

Traders worry about high probability Washington might go it alone in Iraq despite split with key UN members.

LONDON - Oil prices bubbled up Monday as concerns about possible disruption to Middle East supplies mounted ahead of a key report by UN weapons inspectors on Iraq, which traders feared could trigger a US-led Gulf war.

The price of benchmark Brent North Sea crude oil for March delivery rose to 30.60 dollars per barrel in early trading from 30.49 dollars at the close of trading on Friday, when prices had climbed by 77 cents.

In New York, light sweet crude March-dated futures rallied by 1.03 dollars per barrel on Friday to 33.28 dollars.

Prices climbed again as UN arms inspectors prepared to deliver a report to the UN Security Council later Monday on their two months of work hunting down alleged weapons of mass destruction in Iraq.

Amid signs of a split between the United States and other members of the UN Security Council such as France and Russia, traders were worried that the US administration might wage a solo war on Iraq.

"Although everybody is waiting for the weapons inspectors to make their report... the contents seem widely anticipated," said Prudential Bache trader Christopher Bellew.

"It seems likely that the UN is going to give the arms inspectors more time. There is still a very high probability that there could be military intervention by the Americans, and that keeps prices higher at the moment," he added.

Analysts say that the oil market is already suffering a shortage of oil, largely because of a strike in Venezuela that has sent the country's oil output down to a fraction of its usual levels of about three million barrels per day.

Despite recent signs that the stoppages are easing somewhat, the disruption has drained US commercial stocks of crude oil down to uncomfortably low levels for the world's biggest oil consumer.

Against that backdrop, prices have remained high despite the promise of an output increase by the Organisation of Petroleum Exporting Countries (OPEC) of 1.5 million barrels per day, which officially starts next month but has already started flowing, according to experts.

If the market loses Iraq's oil output of about two million barrels per day while Venezuela's exports are crimped, OPEC might not be able to keep a lid on prices, analysts say.

"With US crude stock levels at 27-year lows and OPEC spare capacity looking extremely thin, armed conflict in the Gulf is approaching at a time when the market could hardly be more sensitive to supply disruptions," said Barclays Capital head of research Kevin Norrish.

But he said that any oil price spike was likely to be short-lived and restricted to the period just before war.

"The release of US strategic reserves should limit its extent, while a seasonal slowing of demand combined with strong non-OPEC supply growth will then provide the conditions for substantially lower prices in the second quarter," he wrote in a note to clients.

Venezuela's crude output is now close to a million barrels per day, striking managers of the Petroleos de Venezuela state oil firm said Saturday.

The government has put the figure at more than one million barrels, saying most of the production was being exported.