Oil: All eyes on Mideast conflict

Oil fell more than US$1 a barrel to below US$74 on Tuesday as Arab leaders pressed for an end to fighting between Israel and Lebanese Hizbollah guerrillas.

US crude dropped US$1.15 to US$73.90 a barrel by 1808 GMT while London Brent crude was off US$1.19 at US$73.42.

The war will take center stage at a conference in Rome on Wednesday where Arab and some European nations are expected to call for an immediate cease-fire over Washington's objections.

"Pressure is mounting for a cease-fire. The US green light (for Israel's attacks on Lebanon) will not last forever," said Mike Wittner of investment bank Calyon.

"For the oil markets, there are risks that it could get worse, but there are also chances that you could have some developments to ease the situation."

US crude hit a record US$78.40 a barrel earlier this month on fears the fighting could spread to oil producers in the Middle East, which pumps about a third of the world's supply.

Prime Minister Ehud Olmert said he was determined to pursue Israel's offensive against Hizbollah as he met with US Secretary of State Condoleezza Rice to discuss the conflict.

But Saudi Arabia's King Abdullah warned Israel's actions threatened regional war.

"Saudi Arabia warns everybody that if the peace option fails because of Israeli arrogance, there will be no other option but war," he said.

Israel and the United States agreed that resolving the crisis must include disarming Hizbollah, its removal from Israel's border and deploying an international force to ensure it cannot menace the Jewish state.

"I think it's a message more to US President George W Bush and Condoleezza Rice," SGCIB analyst Deborah White said of the Saudi king's remarks. "I think the world is getting a bit impatient with the US attitude."

Experts agreed prices said oil prices would be held in check as long as Middle East oil exports were unaffected.

"Basically, this war is contained...it is not spreading," said Bill O'Grady, assistant director of market analysis at A.G. Edwards in St. Louis, Missouri.

REFINERY OUTAGES

News of problems at refineries supplying the giant US market with petrol during the summer holiday season also helped support prices.

A distillation unit at Venezuela's Amuay refinery -- part of the world's biggest refining complex -- will be shut for five to seven months following a fire last week, traders said.

Hiccups at several US plants, forecasts for a tropical disturbance in the Gulf of Mexico in the next few days and news that Royal Dutch Shell had been forced to trim more output at its Nigerian Bonny oilfields added to the unease.

Surging oil demand from China, which posted its third month of double-digit growth amid soaring fuel oil imports and curbed petrol exports, lent strength to prices.

Apparent oil demand from the world's second largest consumer rose 15 per cent in June from a year ago, putting the first-half increase at 8 per cent, Reuters calculations based on official data show.

US petrol inventories were expected to have slipped by 400,000 barrels last week, while crude stocks were seen dipping 100,000 barrels, a preliminary Reuters poll found.

- REUTERS