Oil Up as US Turns the Screw on Iraq

reuters.com Thu March 6, 2003 07:12 AM ET By Tom Ashby

LONDON (Reuters) - World oil prices rose toward historical highs on Thursday as the United States suggested that Iraq may have only days to decide to disarm or face war.

Futures traders fear an attack on the world's eighth largest oil exporter could trigger a supply shock at a time when global inventories are at historical lows.

International benchmark Brent crude oil rose 55 cents to $33.55 per barrel, just 40 cents below a two-year high hit last week. U.S. crude, which hit a 12-year high around $40 last week, was 31 cents higher at $37.00.

"There are certainly a lot of people who think the likelihood of a military operation before the end of March is high," said Adam Sieminski of Deutsche Bank investment bank.

Secretary of State Colin Powell sought to blunt opposition to war by arguing that Iraqi President Saddam Hussein had not made a decision to disarm.

"Nothing we have seen... indicates that Saddam Hussein has taken the strategic and political decision to disarm," he said in a speech on Wednesday.

"We will see in the next few days whether or not he understands the situation he is in and he makes that choice."

Chief United Nations weapons inspector Hans Blix is due to deliver his next report on Friday, and the United States wants the Security Council to vote on a war mandate next week.

POWELL CONTRASTS WITH BLIX

Powell's harsh assessment of Iraqi cooperation contrasted with comments by Blix, who said Iraq had stepped up disarmament recently.

Blix said he would release "benchmarks" for disarmament on Friday, but Powell resisted the idea saying: "We've given him enough measures... I think we can pretty much judge now that he is not complying."

Washington and London have about 300,000 troops in the Gulf ready to attack Iraq for allegedly hiding programs to develop nuclear, biological and chemical weapons.

The threat to Gulf oil supplies comes at a time when global oil stocks have slumped below normal levels because of a prolonged strike in exporter Venezuela, and an unusually cold winter in the northern hemisphere.

Latest U.S. government data show stocks of distillates, including heating oil, falling to the lowest level since 1963 on strong winter demand.

Crude stocks in the world's largest consumer are already at their lowest in 27 years.

Fears of war and a supply crunch have sent world oil prices up by a third in the last three months, driving up energy costs at a time of fragile growth in many rich economies.

The Organization for Economic Cooperation and Development, which represents most major industrialized nations, said on Thursday the world economy would be hit if the Iraq crisis led to a sustained period of high oil prices.

The Organization of the Petroleum Exporting Countries, which controls two-thirds of world exports, has pledged to fill any shortfall should war disrupt supplies from Iraq, which now sells around two million barrels daily.

But industry analysts say OPEC may not have enough to cover if war on Iraq also affects supplies from other Gulf countries, and importing countries may have to fall back on their huge emergency stockpiles to fill the gap.