Oil surges to $78 on West Asian conflict

LONDON: Oil prices surged to record highs above $78 on Friday on fears the conflict between Israel and Hizbollah guerrillas could escalate and spread to more Middle East countries.

Iran’s nuclear stand-off with the West, fears over oil supply in Nigeria due to militant attacks, an influx of fund buying and falling US crude supplies also contributed to the rise in the oil market — which is up nearly 30% this year.

US crude soared to as high as $78.4 a barrel in intraday trading. By afternoon, the August contract was at $77, up 30 cents. London Brent was 26 cents higher at $76.9, after jumping to a record of $78.1 a barrel earlier in the session.

“The speculators are out there panicking about Israel because they think it’s going to spread through the Middle East,” said Mike Barry, director at London’s Energy Market Consultants.

Neither Israel nor Lebanon are oil producers but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output, leaving oil traders very nervous.

“Rarely has this market been as jittery,” said Anthony Sabino, professor at St John’s University in New York. Opec sought to calm the market, saying there were sufficient supplies to meet global demand.

“The market remains well-supplied with crude,” the cartel said in a statement, adding “Geo-political developments, over which Opec has no influence, have been behind this sudden rise in volatility.”

The market remains well-supplied with crude, and, with crude volumes continuing to enter the market well in excess of demand, Oecd stocks are above their five-year average levels, it said in a statement.

Illustrating the market’s sustained strength, prices for oil futures contracts to be delivered further ahead were trading above $80, from December ‘06 to August ‘07.

“There is nothing to stop prices at the moment with the stream of headlines that are coming in. All we need now is a big hurricane,” Barry said.

Oil prices averaged $67.7 so far this year, but were still a long way from the inflation adjusted $87.7 average of 1980, the second oil shock that followed the 1979 Iranian revolution.

Some experts cautioned that prices could just as easily fall should tensions ease, especially as much of the money that had been invested was speculative.

“There’s a lot of new financial investment coming into the market,” said Michael Wittner of Calyon investment bank, adding “Some of that will be hot money, so profit-taking could take us below $75 in a heartbeat.”