War fears push oil to record high

Worries over cuts in oil supplies boost the price

The price of oil touched its highest level for two years on Tuesday, as the build-up of troops in the Gulf tested the nerves of oil traders.

With the prospect of a war in Iraq becoming ever more likely, trading remained volatile as fears of an oil shortage pushed up prices.

The US Secretary of State, Colin Powell, told the United Nations Security Council that it should not be scared into "impotence" when it came to dealing with Iraq.

The markets are still very edgy with both Venezuela and Iraq remaining the key issues

Simon Games-Thomas
Oil analyst

However, signs of division in Venezuela's seven-week general strike to strangle oil exports provided some relief.

In London, Brent crude had edged up 37 cents to $31.02 a barrel in early trading, but fell back to $30.74 later in the day.

US light crude rose 70 cents to $34.61 a barrel after hitting a peak of $35.20, its highest level since November 2000.

"The markets are still very edgy with both Venezuela and Iraq remaining the key issues," said independent oil analyst Simon Games-Thomas.

"Prices appear destined to trade higher given the current set of drivers and $35 beckons inexorably in the short term," Mr Games-Thomas added.

Relief in Venezuela

Venezuelan oil tanker pilots in Lake Maracaibo, a strategic export route, have ended their part in the nationwide strike, according to shipping agents.

However, a spokeswoman for striking oil workers said a senior representative would meet with the pilots to persuade them not to abandon their action.

"We still have 90% of oil workers on strike," she said of the action designed to force the resignation of President Hugo Chavez.

As the world's fifth-largest exporter, Venezuela accounts for 13% of US petroleum imports.

A shortfall in supplies has cut US commercial crude stockpiles to 26-year lows.

Shredded nerves

The shooting of contractors working for the US military in Kuwait, resulting in one fatality, also added to the pressure.

A report from Hans Blix could affect prices

Oil traders are concerned that any war in Iraq would limit supplies, despite the resolve of the oil cartel, Opec, to maintain the flow.

Just over a week ago, Opec agreed to increase official production after an emergency meeting in Vienna.

"Opec is trying to send a very strong message that it will do its utmost to stabilise demand and supply," said the cartel's president Abdullah bin Hamad al-Attiyah.

Tension builds

The release of a major report by Chief UN weapons inspector Hans Blix next Monday will provide further direction for the oil price.

The evaluation of the report on 29 January could provide more clues as to the likelihood of a war.

Both the US and the UK are planning a major deployment of forces in the Gulf.

On Tuesday, the US announced it would send nearly 37,000 more personnel to the area in preparation for possible military action.