Supply Fears Push Oil Prices Higher

Oil prices today hit a new two-year high amid nervousness of a supply shortage as war appears imminent in Iraq.

The price of Brent crude hit rose 27 cents to $34.37 a barrel, its highest level in 29 months, while US light crude rose 23 cents to $38.11 a barrel in Asian trade, $3.04 below a peak struck in October 1990 in the build-up to the Gulf war.

The latest rise in oil prices came on the eve of a meeting by Opec oil exporters in Vienna to discuss plans to keep supplies constant if war breaks out. Saudi Arabia, the world's leading oil producer and a key US ally, favours an increase in production to make up for any disruption in Iraqi supplies.

But Iran opposes such a move, saying that such a plan implies support for a US attack, even though there is little love lost between Iran and Iraq.

"Iran will not back politically motivated decisions," the country's oil minister, Bijan Zanganeh, told the official Iranian news agency, IRNA. Opec should refrain from taking decisions which would imply support for a "US military assault against one of Opec's member states", Mr Zanganeh said.

Saudi Arabia has already made it clear that it is prepared to open its pumps to the limit, with or without Opec backing. As the only producer with any significant spare capacity, Riyadh has already boosted output sharply in recent weeks and is now pumping more than nine million barrels daily of its 10.5 million-barrel-a-day capacity.

But the markets are nervous whether that will be enough to make up for shortages. Iraq's supply of 1.7 million barrels daily is almost certain to dry up and Kuwait may have to shut down production near its northern border with Iraq from where US troops are poised to invade, taking out 700,000 barrels a day.

"I think everybody is producing almost full," said Obaid bin Saif al-Nasseri, the United Arab Emirates oil minister, adding that it would be "very difficult" for Opec to compensate for a duel Iraqi and partial Kuwaiti stoppage.

Oil prices have been under pressure not only from the threat of war, but also because of a long-running anti-government strike that crippled Venezuela's oil industry.

Meanwhile, western oil stocks are well below normal. Fuel supplies in the US, hit by a severe winter, are at their lowest levels since the mid-1970s following the Arab oil embargo.

For other Opec members, the prospect of a sudden crash in prices is the biggest worry. Iran and others fear that a seasonal fall in demand in the second quarter could coincide with the end of a short war and send prices falling.

In January 1991, oil prices fell $10 a barrel when the International Energy Agency ordered the emergency release of strategic reserves to coincide with the start of the allied bombing campaign in operation Desert Storm.