Oil prices higher on war worries

afr.com Feb 27 09:11 AFP

World oil prices bolted higher on Wednesday as the twin threats of a possible war in Iraq and low US oil supplies spread fear, traders said.

News that US inventories were close to a 27-year low during a deep freeze, with the threat of a major disruption from a Middle East conflict looming, frightened traders, analysts said.

"The inventory data set panic and fear in the minds of traders," said Fadel Gheit, senior energy analyst at Fahnestock and Co.

"They are starting to think that in the event of a supply disruption we'll be in big trouble," he said.

"Everybody is waiting for a decision regarding war," Gheit added.

"Is the United States going to war alone or with allies? Will this be a long war or a short war? Is Saddam going to stay or not? Are the Iraqi fields going to be left intact?"

New York's benchmark light sweet crude April contract shot up $US1.64 to $US37.70, just shy of a 29-month high, and analysts said the trip to $US40 a barrel may be short.

In London, the price of benchmark Brent North Sea crude oil for April delivery leapt US75¢ to $US33.07 a barrel. advertisement advertisement

According to the Department of Energy, US crude oil stocks fell 1.0 million barrels or 0.4 per cent to 271.9 million barrels in the week ended February 21 when compared to the previous week.

The inventories neared a 27-year low of 269.8 million barrels reported February 12.

Crude oil imports, squeezed by a strike that shook major exporter Venezuela's petroleum industry, fell 437,000 barrels to 8.325 million barrels a day, the government said.

"We've been locked in a deep freeze for two months. We have a potential supply disruption and an important supplier, Venezuela, has kept a significant portion of its production off the market because of the strike," said Mike Fitzpatrick, analyst at Fimat.

"It's only two dollars to get to $US40 (a barrel). We could get there very rapidly," he warned.

"We are at levels right now where it's impossible to tell where we're going," Fitzpatrick said. But "all fundamental elements point to a higher market".

The spectre of a war in Iraq fuelled the rise after Iraqi President Saddam Hussein declared that he would never accept a deal to go into exile, vowing instead to die on his native land.

But Saddam also said his forces would not blow up Iraq's oil wells in the event of war. Baghdad's retreating forces torched fields in Kuwait at the close of the 1991 Gulf war as US-led forces chased them out of the emirate.

Commerzbank analyst Steve Turner in London said prices were helped by Organisation of the Islamic Conference (OIC) members who said they were considering using oil as a "weapon" to fend off an attack on Iraq.

Malaysian Prime Minister Mahathir Mohamad, who called the informal meeting of 48 OIC nations in Kuala Lumpur, warned that tinkering with the oil market could backfire on poorer nations but said it must be considered.

"Some say it might cause a lot of repercussions, but if we don't think about it we may not be able to exert some influence in our favour," Mahathir said.

But "Oil is a double-edged weapon," he added.

"The price of oil goes up, many of the countries of the south are going to suffer the most, many of those poor countries who have no oil."