Oil: Relief as Mideast turmoil simmers

Oil fell more than 2 per cent on Monday amid relief that a raging conflict between Israel and Lebanese Hizbollah guerrillas had not spread to other countries in the oil-rich Middle East.

US light crude CLQ6 settled down US$1.73 at US$75.30 a barrel, US$3 below the high of US$78.40 hit on Friday. Brent for September LCOU6 traded US$1.66 lower to US$75.92, after touching a record US$78.18 a barrel early in the session.

In the sixth day of escalating violence, Israeli airstrikes killed more than 42 people in Lebanon and Hizbollah rockets slammed into parts of northern Israel, but the fighting did not spread as some energy dealers had feared.

"The fighting didn't really extend into Syria or involve Iran. That was the big concern for oil traders," said Phil Flynn, analyst at Alaron Trading in Chicago. "It's also option expiration day."

Israel dismissed as premature a UN proposal for an international peacekeeping force to help end the worst fighting across the Israeli-Lebanese border in more than 20 years. Oil had weakened early in the day on a report, quickly denied by Israeli officials, that Israel would soon end its offensive.

"Given the importance of geopolitics to the market at the moment, prices will see-saw with the news flow," said Eoin O'Callaghan, economist at BNP Paribas.

Israeli aircraft blasted Lebanon on Monday after Hizbollah rockets struck deeper than ever into Israel, with no diplomatic initiative in sight to end the fighting.

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.

REGIONAL HUE

The conflict threatens to suck in Hizbollah's Syrian and Iranian allies, and to compound the conflict between the West and Iran over Tehran's nuclear programme.

"The crisis has quickly taken on a regional hue, with both Washington and Tel Aviv accusing Iran and Syria of orchestrating the attacks," said Washington-based energy consultants PFC in a report.

"As a result, US policy toward Tehran is likely to harden even further, and could undermine already fraught efforts to resolve the Iranian uranium enrichment issue diplomatically."

The world's fourth-largest oil exporter insists it is enriching uranium for electricity generation, but the United States fears that could be a front for bomb-making activities.

On Sunday, Iran condemned a decision to return its nuclear file to the UN Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons.

In Iraq, scrambling to restore its oil exports to pre-war levels, the head of the country's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.

Analysts saw no let-up in prices in the near term.

"We would expect front-month prices to rise above US$80 this quarter," said O'Callaghan. "On the one hand geopolitics, and on the other fundamentals are tight. And we also have the possibility of hurricanes."

Opec said on Friday that high prices and slower economic expansion would moderate global oil demand growth next year. Opec economists forecast oil demand would rise by 1.3 million barrels per day, down from 1.4 million bpd in 2006.

The producer group expects the need for its oil to fall next year as more projects from rival suppliers come on line, allowing Opec to rebuild its spare capacity.

A senior Opec delegate on Monday said the group could do nothing to lower oil prices as they are being driven by Middle East violence rather than any shortage of oil

The world does not need more oil, but more investment in production capacity to deal with supply shocks, the head of the Paris-based International Energy Agency told Reuters.

Analysts have expressed concerns about the effects of high energy prices on global economic growth. But US Energy Secretary Sam Bodman said on Friday the economy of the top energy consumer has held up against rising fuel costs. (Additional reporting by Paul Marriott in Sydney and Simon Webb in London)

- REUTERS