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Oil prices at 3-month low

Opec exporters pledged to fill any supply gap from the conflict in the Gulf, while the West's energy watchdog, the International Energy Agency, said it saw no reason to release emergency stocks.

Hours after US cruise missiles hit targets in Baghdad, officials in neighbouring Kuwait said oil output was normal, despite two Iraqi missiles hitting the north of the country.

Oil tanker traffic from the Gulf, which provides 40 per cent of world oil exports, was also running smoothly, shippers said.

Benchmark Brent crude oil fell 20 cents to $26.55 per barrel, having touched a three-month low of $25.50 soon after the attack began.

Oil has shed a quarter of its value in the last week on a massive bet by investment funds that war will end quickly without major damage to oil installations.

US crude futures for May delivery fell 51 cents to $28.85. "The war premium is diminishing on a growing certainty that coalition forces will prevail and allow Iraq to increase production," said Peter Gignoux of Schroder Salomon Smith Barney.

Industry consultant Geoff Pyne said there were still dangers ahead that could drive prices back up.

"Most obviously, there is a danger that Saddam may blow up the Iraqi oilfields," he said.

Iraqi Oil Minister Amir Muhammed Rasheed denied a Kuwaiti television report that oil wells near the southern city of Basra were on fire.

The Organisation of the Petroleum Exporting Countries said it was ready to tap its spare capacity to make up for any shortage from Iraq, although markets were now well supplied.

"We are not thinking of any increase in production," said Opec President Abdullah Al Attiyah.

"Oil prices are heading downwards. This shows there is more oil in the market than the market can absorb." Saudi Arabia said oilfields and export terminals in the world's biggest exporter were running normally and was ready to pump more oil to stabilise markets. Riyadh has already ramped up production well beyond nine million barrels daily, versus an Opec quota of eight million.

The International Energy Agency (IEA) said there was no need for industrialised nations of the West to release emergency stocks as it was confident Opec could cover the shortfall.

"At the precise hour we speak, I think it is not necessary (to release stocks)," IEA executive director Claude Mandil told Reuters. "We had a very strong statement from Opec, which has said they will ensure any shortfall and we are confident they will do their best."

Iraqi exports from the Gulf ground to a halt on Monday after the United Nations evacuated its staff overseeing Baghdad's oil-for-food programme.

Some exports have continued through an Iraqi pipeline to the Turkish Mediterranean, although at much reduced levels.