Iraq Fighting Fuels Oil Price Rise

Global oil prices rose to record levels today as fighting in Iraq between radical cleric Moqtada al-Sadr and coalition forces continued.

Mr Sadr's militia has repeatedly threatened to target Iraq's vulnerable oil infrastructure, especially its pipeline network, fuelling market fears about tight global supplies.

US light crude for September set a record $48.98 a barrel before easing to $48.63, down seven cents on the day. It jumped $1.43 on Thursday and has risen nearly $12 a barrel, or 32% since the end of June. London Brent hit a new record $44.50 a barrel, up 17 cents.

The push to new peaks came as US warplanes pounded areas near a shrine in Najaf where some of the Shia militia were positioned. Mr Sadr defied an ultimatum from Iraq's interim government to disarm.

On Thursday, saboteurs set fire to the headquarters of the South Oil Company in Iraq's port city of Basra, witnesses said. Iraq's main southern pipeline from the Basra oilfields has been shut since the last sabotage raid on August 9, curbing exports to about a million barrels a day, half the normal rate.

"The rise in oil prices is a cause for concern," European monetary affairs commissioner Joaquin Almunia said today, adding that he hoped it would not derail economic recovery.

"All of us are concerned with increases of oil prices but I hope we will not avoid a strengthening of our recovery," Mr Almunia told reporters.

"I hope we will keep our recovery intact and we will even have growth greater than in our last forecasts," he added on his way into an informal meeting of designated commissioners who are due to take office in November.

Market watchers said some investors had started to whisper about the possibility of a price of $60 a barrel, even as they said that sentiment could turn rapidly if tensions in global hotspots abated, or demand dropped as users started to economise in earnest.

Oil demand is rising due to global economic growth, despite the high prices. This has compounded the pressure placed on other oil-producing countries by the problems in Iraq.

International Monetary Fund director Rodrigo Rato was quoted today saying he still expected global economic growth this year of 4.6%.

China's oil demand shows no evidence of easing, defying government efforts to slow an economic boom. Chinese crude imports for July jumped 41%, with imports for the year to the end of July up 40% year on year, according to customs data.

India's top refiner, the state-run Indian Oil Corporation, said it expected the country's crude oil imports to rise 11% in 2004/05. An oil ministry official said India's crude oil import bill was expected to rise 50% to $27bn this fiscal year.

"Many Asian countries, most of whom are oil consumers, are starting to hurt," said David Thurtell, commodity strategist with Commonwealth Bank of Australia.

He said that, while some countries like France and Germany reckoned high oil values had not threatened economic growth and US inflation remained in check, some impact was already being seen.

"We are already seeing things softening in the US," Mr Thurtell said. "I suspect the market will settle down a bit after this, especially with higher production expected in September from Opec."

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

In April, the European Union executive forecast 1.7% eurozone economic growth in 2004 in its spring forecast. But Mr Almunia has said on several occasions that the forecast appears to be on the low side.

The outlook for 2005, however, is uncertain due to oil prices and the strength of domestic demand. The commission has forecast a 2.3% economic expansion in 2005.

"At least I hope not to have to reduce the forecast for the next year," Almunia said when asked about the 2005 outlook.