Mideast tensions send oil price soaring
By Kevin Morrison and Roula Khalaf in London
Published: May 4 2004 20:33 | Last Updated: May 4 2004 20:33

Oil prices on Tuesday reached their highest level since the lead-up to the first Gulf war amid fears over oil supplies from an increasingly violent Middle East.

The benchmark Brent futures contract peaked at $35.92 a barrel, its highest since October 1990, after Saudi militants attacked western expatriates at a petrochemical complex at the weekend. "The security premium in crude oil prices grows by the day," John Kilduff, senior vice-president of energy risk management at Fimat USA, told Bloomberg.

After climbing 83 cents on Monday the key US crude futures contract rose $1.09 to touch a new post-Iraq war intra-day high of $39.15 a barrel.

A year after George W. Bush, US president, declared "major hostilities" at an end in a war designed to bring peace and stability to the Middle East, tensions have been rising across the region.

"The Middle East is becoming a very tense place," said Seth Kleinman, energy analyst at PFC Energy. "Attacks in Saudi Arabia, Syria, [a foiled attack in] Turkey, while the resistance in Iraq is becoming more widespread. And this is set against a backdrop of the deteriorating Israel/Palestine situation, which is likely to keep violence simmering in the region."

The oil market is tight - the biggest producers are cutting supply, and demand is strong in China and the US, which is about to enter the driving season.

The first assault against an economic target in Saudi Arabia, the world's largest oil producer, came shortly after a foiled suicide attack on the Basra oil terminal in southern Iraq last week.

The shooting spree in the Saudi city of Yanbu has sent shockwaves through the expatriate community on which the Saudi economy heavily relies. The US is asking Americans to leave.

ABB Lummus, the energy arm of the Swiss-Swedish engineering and oil services group and the company whose employees were killed in the attack, has said all its expatriate staff would be pulled out of Yanbu.

Vera de Ladoucette, senior director of Middle East research for Cambridge Energy Research Associates, said any significant disruption would have widespread effect as the world's oil-producing capacity was near its limit. She said: "There is only 3m barrels a day of spare capacity, this is why the markets are nervous - because the balance between supply and demand is so tight now."

Mr Kleinman said more attacks on oil plants or terminals could send prices above $40 a barrel.

The latest price is still well below levels seen during the oil shocks of the early 1970s and 1979 following the revolution in Iran.

Mr Kleinman said the higher prices would force Opec members to produce more oil. He said: "There is more of an incentive for [Opec] to not cut back by as much, but they won't be increasing the Opec quota."