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Rising oil rattles financial marts

Oil prices reached a new historic peak of 44.28 dollars per barrel in New York and an all-time record of 40.96 dollars per barrel in London. Markets shivered after Opec warned that it could not pump any faster to keep up with fast-growing demand, adding to market worries over terrorism and the risk of supply disruptions in Russia, Iraq and Venezuela.

"There is enough oil geographically at the moment, but the supply chain is tight and there is little room for disruption - hence the concerns over troubles at Russian oil company Yukos," analysts at Standard Chartered said.

With the Bank of England and the European Central Bank preparing to announce interest rate decisions this week, investors were also growing increasingly concerned about the impact of rising energy costs on monetary policy.

Oil prices were now "looking very dangerous" for global financial markets, warned Anais Faraj, global equity strategist at Nomura Securities. "The key risk now is that central bankers feel obliged to carry on raising rates in the face of an oil shock. "Indeed, the alternative - accommodating higher real oil prices - could easily replicate the inflation of the 1970s. Either way, bond and equity prices face significant policy risk," he warned clients.

A quarter-point interest rate rise by the Bank of England to 4.75 per cent on Thursday - the fifth since November - is seen by economists as a done deal.

But the European Central Bank, whose meeting on Thursday will be held by means of a teleconference without the usual Press conference afterwards, is not expected to move yet with the eurozone economies still sluggish. On the world's major stockmarkets, investors punished shares amid fears about the impact of rising energy costs and interest rates on corporate profits, though losses were offset somewhat by gains among oil stocks.

In Tokyo the Nikkei-225 share index lost 1.17 per cent to 11,010.02 points, following in the footsteps of Wall Street where investors also marked down shares a day earlier amid worries about the impact of soaring energy costs.

European stock markets followed suit.

The British FTSE 100 index dropped 1.04 per cent to 4,383.50 points in early afternoon trading, the German DAX 30 slid 1.67 per cent to 3,812.49 points and the French CAC 40 lost 1.45 per cent to 3,597.99 points.

Surging oil prices also impacted on the foreign exchange market, weighing on the currencies of countries which rely heavily on oil imports in particular, such as Japan.

"The yen has been undermined against the dollar by the further sharp increase in crude oil prices this week," said Paul Chertkow, economist at the Bank of Tokyo-Mitsubishi.

"There is concern that the resultant higher energy costs will temper the strength of external demand and retard the recovery of domestic demand." The single European currency fell to 1.2014 dollars in early afternoon trading in Europe from 1.2055 late on Tuesday in New York.