Oil: Mideast crisis not seen escalating

Oil fell below US$74 a barrel on Tuesday as concerns the conflict between Israel and Hizbollah would spread eased after US Secretary of State Condoleezza Rice said a cease-fire should come as soon as possible.

US light sweet crude traded down US$1.35 to US$73.95 a barrel at 1816 GMT after hitting a high of US$76.55 a barrel earlier in the day. London's Brent crude gave up US$1.05 to trade at US$74.87 a barrel.

Oil prices came off sharply after Rice said a cease-fire should happen "as soon as possible when conditions are conducive to do so."

"We were thinking over the weekend that this conflict would expand, possibly to involve Syria and Iran. Now there is growing belief that this will not enlarge, though it may drag on for a while," said Mark Waggoner, president of Excel Futures in Huntington Beach, California.

Rice's comments came after Israeli warplanes battered Lebanon, killing 31 people, and more Hizbollah rockets struck the Israeli city of Haifa. Crude prices rose in early activity on concerns the violence could spread further into the Middle East, source of almost a third of the world's oil.

Crude was also pressured by a 3.4 per cent fall in gold prices during late US activity. Metals and oil have frequently traded closely this year as funds increase exposure in commodities.

"People are looking at the possibility of a cease-fire in the Middle East, which would ease this market. Also, the metals are down, which is something you wouldn't expect," said Tom Bentz of BNP Paribas Commodity Futures Inc.

Oil in New York hit a record high of US$78.40 on Friday and is up 25 per cent this year largely because of the Middle East fighting, a dispute over Iran's nuclear programme and a flow of investor money into commodities.

Traders had feared the violence, triggered when Hizbollah seized two Israeli soldiers and killed eight on July 12, could engulf major regional crude oil producers.

CONCERNS OF SPREAD

The conflict threatens to suck in Hizbollah's Syrian and Iranian allies and to inflame the nuclear row between the West and Iran, keeping the heat under prices, analysts say.

Iran, the world's fourth-biggest oil exporter, funded and supplied Hizbollah during the 1980s but denies providing weapons in the latest round of violence.

Israel's army said on Tuesday that Hizbollah was smuggling weapons from Syria but added it did not regard Syria as a target for attack.

Rising demand in the United States, the world's largest oil consumer, and strong economic growth in China have also supported recent strong oil prices.

Petrol inventories in the United States, where the peak demand driving season is in full swing, were predicted in a Reuters survey to have fallen by 500,000 barrels last week.

China on Tuesday reported second-quarter growth of 11.3 per cent, faster than the 10.5 per cent predicted by analysts. The country is the world's second largest oil consumer.

- REUTERS