Oil simmering at a six-month high on Iraqi embargo threat

Oil simmering at a six-month high on Iraqi embargo threat

Reuters, London

Oil prices steadied at six-month highs on Tuesday as some Muslim exporters reacted cooly to Iraq's threat to cut off supplies to the West to force Israel out of Palestinian territories.

International benchmark Brent crude oil, opening for the first time after a four-day Easter holiday, caught up with a spike in U.S. prices the day before and hit a six-month high of US$26.78 per barrel, up 86 cents from Thursday's close.

U.S. light crude futures stood 27 cents higher at $27.15, having touched a six-month high at $27.40 a barrel on Monday.

Israeli forces advanced into more Palestinian areas of the West Bank on Tuesday in retaliation for a wave of suicide bombings, provoking a wave of criticism from the Islamic world.

But delegates attending a Organisation of the Islamic Conference meeting in Malaysia gave no support to Iraq's proposed use of an oil embargo as a weapon against supporters of Israel.

"This is impossible. How can we support our Palestinian brothers if we do not have revenues?" a Kuwaiti delegate told Reuters.

"We have to be realistic when talking about the oil weapon. This is a double-edged sword that will do more harm to us than the United States both in the short and long term," he added.

Although neither Israel nor the Palestinians export oil, traders fear unrest could spread in the Middle East which holds some two-thirds of the world's petroleum reserves.

Israeli Prime Minister Ariel Sharon has promised an "uncompromising war" to crush what he called a terror campaign directed by Palestinian President Yasser Arafat, who is under siege by Israeli tanks at his Ramallah headquarters.

Iraq's ruling Baath Party on Monday called on Arab states to use oil as a weapon to punish countries supporting Israel.

Iranian Foreign Minister Kamal Kharrazi said the oil weapon could be an effective tool if it had the full backing of Arab producers, but pro-Israel Washington should first convince the Sharon administration to withdraw.

Iran and Kuwait are members of the Organisation of the Petroleum Exporting Countries (OPEC), which groups most major Arab oil-producing nations and supplies more than 20 million barrels per day (bpd) of crude to the 76 million bpd global market.

Arab nations have not used the oil weapon since the embargo in the 1970s that quadrupled oil prices and severely hit Western nations.

Oil has risen almost 50 percent since a mid-January dip below $18 a barrel and some economists fear high energy prices could derail the fragile U.S. economic recovery.

A sustained rise in energy costs would cut into corporate profits and hit consumer spending through higher pump prices.

Any oil embargo, however, also would need the backing of other big Arab exporters, such as Saudi Arabia, which are competing with rising production from non-OPEC members.

Saudi Arabia and front-line states Egypt, Jordan and Syria did not send their foreign ministers to Kuala Lumpur.

Indonesia, the world's biggest Muslim nation and Asia's only OPEC member, said it would be "quite impossible" to obtain consensus in the cartel to use the oil weapon.