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Oil may hit $40 before rich states open taps

LONDON Sizzling oil prices could rise by another 25 per cent to over $40 a barrel before rich nations open the taps at their massive emergency stockpiles to cool the rally, oil analysts said yesterday.

Prices have already jumped 45 per cent in three months to mid-$30s per barrel on an explosive cocktail of Iraq war fears, a crippling strike in Venezuela and biting cold in Europe and the United States.

The West has so far baulked at releasing stockpiled oil, confident that Saudi Arabia and others in the Organisation of the Petroleum Exporting Countries are stepping in to cover shortfalls.

But analysts said a stock release may be needed to cap prices in the $40s if war starts on Iraq, the world's eighth largest oil exporter, within a month.

"If the US and Britain decide a military operation is required, the key question is whether there will be a simultaneous announcement that the US Strategic Petroleum Reserve will be used," saidAdam Sieminski of Deutsche Bank.

"I think it will, and this should prevent prices going much over $40."

World oil prices are hovering around two-year highs, with benchmark Brent crude up 10 cents on Friday at $32.56 a barrel and US crude futures at $36.38, up two cents.

High energy costs are already hurting fragile global economic growth, and economists estimate every $10 rise over a year cuts world growth by 0.5 percentage points.

The United States, which with 600 million barrels has the largest emergency stockpiles in the world, has said it is monitoring the situation but that there would be no release yet.

The European Union on Thursday tried to play down expectations of a release saying it was confident Opec could cover should Iraqi supplies be hit.

"The view of the Commission is that there is today no threat of disruption of supply and we are confident in the responsibility of producer countries," a spokesman said.

Mike Rothman, oil analyst for investment bank Merrill Lynch, said he had raised the top end of his 30-day oil price forecast to $41 per barrel for US crude.

"Given the temporary loss of Iraq's exports in the event of war and Opec having to push against their production barriers to make up for those barrels, it becomes obvious that any other interruptions introduce additional upside near-term price risk which would have to be dealt with through the use of emergency oil inventories," he said in a note yesterday.

Rothman said $41 was a significant level because it marked the peak before the 1991 Gulf War and the start of the Iran-Iraq war in 1980.

The Organisation for Economic Co-operation and Development (OECD), which represents the world's richest nations, set up emergency reserves in the aftermath of the 1973 oil crisis, and now oversees 1.3 billion barrels. In addition, oil companies hold 2.5 billion barrels of oil in the OECD, bringing the combined stock level to 3.8 billion barrels, equivalent to 114 days of imports.

The International Energy Agency, the OECD's energy watchdog, can deliver up to 13 million barrels per day (bpd) of stored oil to markets for one month, a rate that falls to five million bpd in the fourth month.

This compares to Iraqi output of 2.5 million bpd, and total Gulf crude flows of some 22 million bpd.