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Wednesday, 11 October, 2000, 16:06 GMT 17:06 UK
Clashes fuel oil price rise
Israeli soldier
Oil traders fear violence might spread throughout the region
By Fiona Symon

The current mood of belligerence in the Middle East has helped push the oil price back above the pain barrier for Western economies.

Oil is at back at three-week highs after easing below $30 a barrel in response to Opec's intervention and the US decision to dip into its strategic oil reserves.

Oil rig
The oil market is susceptible to psychological factors
The Paris-based International Energy Agency noted on Tuesday that oil markets remained prey to extreme volatility with only a thin layer of spare stocks cushioning against shortages.

The energy watchdog said low inventories and physical limitations on the amount of oil refineries can process are adding to the vulnerability of oil markets as the Western economies enter their period of peak demand over the winter.

Some analysts are predicting a $40 barrel this winter if the weather is severe.

Saudi pressures

Saudi Crown Prince Abdullah's warning on Monday that the kingdom and the Arab and Islamic world not be mere bystanders to events in the Middle East set off alarm bells.

The kingdom is the world's biggest oil producer and played a key role in calming the markets last month by pledging that it would produce whatever volumes were required to stabilise oil prices.

Saudi Crown Prince Abdullah
Prince Abdullah issued a stark warning about the Middle East crisis
Although the kingdom is reported to have ruled out the use of oil as a political weapon - as happened in the 1970s - analysts do not exclude the possibility that it could exert some indirect pressure by refusing to agree to further output increases in the event that prices remain high.

Opec members are in fact already concerned that the market is oversupplied with oil and they fear that this could lead to an oil price crash in the spring.

For this reason, too, they are likely to resist pressure to agree further increases in output.

Psychological factors

Although most analysts are agreed that there is plenty of oil on the market to meet world demand, the market is notoriously susceptible to psychological factors.

Oil traders are watching events in Israel and the Palestinian territories closely for signs that the conflict could spread to oil-producing Arab states and disrupt supplies.

Analysts say concerns over oil stocks and tensions in the Middle East have added around $4 to $5 to the current oil price.

If the violence were to spread to other countries in the region, there are no limits to the impact this could have on the oil price, or to the havoc this could wreak on the Western economies.

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See also:

09 Oct 00 | Business
Oil pushes up industry costs
28 Sep 00 | Business
Opec calls for 'fair' oil prices
28 Sep 00 | Business
Oil eases on Saudi assurance
05 Oct 00 | Business
Oil dips below $30
23 Sep 00 | Americas
US taps oil reserve
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