Jittery oil market watches Iraq

Markets have drawn some relief from apparent progress in the conflict in Iraq, though subsequent flare up in fighting threatens to push prices to new record levels.

    Price rises since June have been fuelled partly by strong demand

    A barrel of light crude was quoted at $47.60 on Friday, down $1.10, on the New York Mercantile Exchange after hitting a record intra-day high earlier in the session at $49.40.

     

    Events in Iraq on Friday, where a bloody standoff between US-led forces and the militia of Shia leader Muqtada al-Sadr seemed to be heading for a peaceful resolution, helped cool the overheated market.

     

    That eased Wall Street's fears that skyrocketing oil prices could spur inflation, raise consumer prices and put a large dent in third quarter earnings reports.

     

    But the resumption of clashes on Saturday and confusion about peace prospects risks pushing up prices again when markets reopen on Monday.



    Earlier on Friday, oil prices which have risen more than 29% since the end of June and set records in all but one of the past 16 trading days, looked set to continue their record-breaking r

    ally.

       

    Rising world oil demand has left little slack in the system to cope with disruptions in Iraq, where fighters of Shia leader al-Sadr's al-Mahdi Army have said

    they will target oil infrastructure if US occupation forces do not leave Najaf.

     

    Nervousness in the market increased on Thursday after Shia fighters broke into

    the headquarters of Iraq's South Oil Company and set the company's warehouses and

    offices on fire.

      

    Momentum of fear

     

    Underpinning the nervousness is the belief that the Organisation of Petroleum Exporting Countries (OPEC) in general, Saudi Arabia in particular, does not have the ability to raise production high enough in the event of a major global supply disruption.

     

    Al-Mahdi fighters have attacked
    South Oil headquarters in Iraq

    "The momentum of fear is running so hot now, everyone is waiting for something bad to happen," said Ng Weng Hoong, editor at EnergyAsia.com in Singapore.

      

    When adjusted for inflation, oil is roughly $8 less a barrel than it was leading up to the first Gulf War. That disparity is quickly disappearing, though.  

     

    Wall Street's biggest fear is that rising energy prices will further increase the costs of shipping goods to market, thus driving up prices for consumers who are themselves hard hit by high petrol prices.

    However, US Treasury Secretary John Snow has said the situation is not dire enough to warrant releasting oil from the nation's reserves.

     

    Iraqi output and exports have been hampered recently by fighting in the southern part of the country, putting upward pressure on global oil prices at a time of strong demand in China and the United States and supply concerns in Russia, Venezuela and other petroleum-producing nations.

    SOURCE: Agencies


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