• Home
• /
• Business

Oil prices soar to two-year high

LONDON Oil prices climbed to two-year highs yesterday, fuelled by worries that the US drive for military force against oil exporter Iraq, despite opposition from key allies, could excacerbate already tight supplies.

Expectations that a blast of Arctic weather had further eaten away at wafer-thin winter fuel stocks in the United States also underpinned oil prices, which are little more than $5 below peaks in the build-up to the 1991 Gulf War.

By mid-morning in London, benchmark Brent blend LCOc1 was traded 28 cents higher at $32.65 a barrel while US light crude CLc1 climbed 25 cents to $35.69 a barrel, the highest level since late November 2000.

The International Energy Agency, the industrialised world's energy watchdog, heightened fears of a supply crunch with a report showing that spare capacity from the top oil producers might not be sufficient to cover a disruption of Iraq's supply.

'It is clear that there could be little surplus supply in the system if Iraqi or other Arab Gulf supplies go down any time soon and Venezuelan supply remains constrained,' the Paris-based group said in its monthly oil report.

Venezuela's output, crippled by an over two-month opposition strike against President Hugo Chavez, has recovered but is still only around 1.45 million barrels per day (bpd), according to striking oil workers, about half its production before the action.

And despite a growing rift with European powers France, Germany and Russia, the United States continues to press its case for military action to unseat Iraqi President Saddam Hussein, which it accuses of hiding weapons of mass destruction.

Top UN weapons inspectors are due to report to the United Nations Security Council on Friday on their efforts to assess Iraq's weapons programmes, a presentation that Washington has described as 'pivotal' in deciding whether to go to war.

Baghdad produces about 2.5 million bpd and exports up to two million bpd, an amount that may not be easily made up by other Opec producers excluding strike-hit Venezuela with spare capacity of only 2.28 million bpd, the IEA said in its report.

The threat of war and possible disruptions to Middle East oil flows which accounts for 40 per cent of globally traded crude and the cut in Venezuelan crude exports have driven oil prices up more than 30 per cent since the end of November.

US crude is just $2 short of prices in 2000 when the administration of President Bill Clinton ordered the release of reserves from strategic stocks, but the Chairman of US oil giant ExxonMobil Lee Raymond on Tuesday advised against unleashing emergency stocks as a means of reducing high energy prices.

A seasonal decline in demand in the second quarter may help ease some concerns, the IEA added.

Weekly US data due from the government and an industry group at 1400GMT should shed more light on the status of current supplies, with forecasts expected to show heating oil tanks drained yet again amid freezing cold in the US Northeast, the world's biggest heating oil market.

US distillate stocks, including heating oil, have fallen 20 million barrels, or 15 per cent, in the last three weeks and are expected to drop another four million barrels.