Oil: Price holds strong after 7-week high

NEW YORK - Oil prices on Tuesday held 17 per cent gains made over the past three weeks after soaring to a seven-week high above US$49 a barrel on frigid temperatures in the US Northeast.

US oil futures settled at US$48.38 a barrel, unchanged from last Friday's close, after touching their highest level since Nov. 30 at US$49.50. The New York Mercantile Exchange was closed for a holiday on Monday.

London's Brent crude rose 36 cents to US$45.39 a barrel on the International Petroleum Exchange.

The first real cold snap of the year for the US Northeast, the world's largest heating oil market, has focused attention on thin US winter fuel inventories, which are 7 per cent below year-ago levels.

"The fund money is short heating oil, which is enough to propel it (crude) back above US$50," said Paul Horsnell of Barclays Capital. "The longer-term view is tighter, with the IEA finding more oil demand and less non-OPEC supply."

Temperatures in the US Northeast were expected to be as much as 15 to 22 degrees (8-11 Celsius) below normal this week, private forecaster Meteorlogix said on Tuesday, one of the most severe cold spells in what has been an unusually warm winter.

The cold will boost household demand for heating oil this week to 14 per cent above normal in New England, the National Weather Service said.

The Organization of Petroleum Exporting Countries will need to pump more oil than expected during the northern winter because of supply problems outside the cartel, the International Energy Agency said on Tuesday.

Demand for OPEC oil will be 500,000 barrels per day higher, at 28.6 million bpd, in the first quarter, as oil field disruptions in North America and the North Sea reduce non-OPEC supply, the IEA said.

Lower-than-expected growth in non-OPEC production has helped tighten world oil supply, already constrained by rapid demand growth in the United States and China.

The IEA also lifted its forecast on OPEC supply by 300,000 bpd for the second quarter, when demand usually ebbs.

The cartel meets Jan. 30 to discuss whether it may need additional supply cuts ahead of the second quarter.

Some OPEC members have said the cartel might deepen the 1-million-bpd cuts that came into effect on January 1, if it sees prices drop below US$40 a barrel, but there has been little talk of restraining prices amid the US$7 gains since late December, which have brought oil to near US$50 a barrel.

"What's interesting about OPEC these days is their coherence to cuts," Paul Sankey, an analyst at Deutsche Bank in New York, said about the cartel's cut in January.

"Would they cut now? No," he said, adding that the cartel is cautious not to hurt the global economy, which would cut demand for its oil.

Simmering tensions between the United States and Iran, OPEC's second largest producer, also helped support prices.

President Bush said on Monday he would not rule out military action against Iran if it was not more forthcoming about its nuclear weapons program.

Iran's defence minister was quoted on Tuesday as saying that the Islamic Republic has the military might to deter attacks.

- REUTERS