Crude prices settle above US$40 for first time in a week as fighting rages in the Middle East

Source: Agencies  |   2008-12-30  |     ONLINE EDITION

CRUDE prices rose above US$40 a barrel yesterday as Israel and Palestinian militants exchanged rocket fire and the death toll mounted in the oil-rich region.

Light trading contributed to market volatility in the final days of 2008, with price swings of close to US$5 a barrel.

Light, sweet crude for February delivery rose US$2.31 to settle at US$40.02 a barrel on the New York Mercantile Exchange, the first time crude has ended the day above US$40 in a week. Nymex will be closed Thursday for the New Year's Day holiday.

In London, February Brent crude rose US$2.18 to settle at US$40.55 a barrel on the ICE Futures exchange.

Retail gasoline prices in the US continued to fall and neared US$1.60 per gallon (42 cents a liter) nationally yesterday.

In the Middle East, Israel destroyed symbols of Hamas power on the third day of what the defense minister described yesterday as a "war to the bitter end." The three-day death toll rose to at least 364 on yesterday, with some 1,400 reported wounded. Israel launched its campaign, the deadliest against Palestinians in decades, on Saturday in retaliation for rocket fire aimed at civilians in southern Israeli towns.

Israel obliterated symbols of Hamas power, with missiles striking next to the Hamas premier's home, and devastating a security compound and a university building.

Phil Flynn, an analyst at Alaron Trading Corp in Chicago, called oil's initial run-up "an emotional reaction to what was going on in Israel," and said similar, short-lived spikes have occurred during other clashes in the region.

"In reality, the likelihood the conflict is going to interrupt oil supply in any way, shape or form is highly unlikely," Flynn said. "Obviously, if the conflict widens, and other countries get involved directly, you might have a different situation."

There were also hints from China the government could go on a crude-buying spree to take advantage of prices below US$40 a barrel. A senior government official writing in the People's Daily said China wants to increase its oil reserves to cushion supply shocks that it believes are inevitable.

China is encouraging companies to use all spare petroleum storage capacity to take advantage of the current low prices, the official said.

Asia's biggest refiner, the state-owned China Petroleum & Chemical Corp, recently completed construction of its largest storage project, a 38-tank facility with a total capacity of 32.4 million barrels.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced crude production cuts totaling more than 4 million barrels per day as it tries to stop the decline in prices. OPEC members, however, have a history of ignoring announced quotas and crude traders are looking for evidence the 13-nation group is tightening the spigot.

In Vienna, JBC Energy, in its daily newsletter, said "the UAE has decided to reduce crude supplies in January and February in line with the OPEC production cuts." The United Arab Emirates are the fourth-largest producers in the 13-nation cartel.

Analysts at the US firm Cameron Hanover noted yesterday the UAE, unlike a number of other OPEC members, typically abides by planned cuts. "If OPEC countries actually cut all of the output they have agreed to cut, global supplies of crude will be tighter come spring," Cameron Hanover said.

Oil prices have fallen 73 percent since peaking at US$147.27 a barrel on July 11 as a credit crisis in the US sparked a steep drop-off in consumer demand and corporate earnings. Analysts expect more dismal economic news from the fourth quarter over the next few weeks.