Oil: Price gains war premium on US reprisal fear

10.00 am

LONDON - World oil prices added a war premium on Friday on fears of US military retaliation for Tuesday's suicide attacks on New York and Washington.

European benchmark Brent Blend crude oil jumped $US1.27, or five per cent, to $US29.64 per barrel by 1425 GMT.

"This reflects nervousness about a situation that has Middle East overtones," said Peter Gignoux of Schroder Salomon Smith Barney in London.

"Call it a war premium or fear premium, there seem to be no rules any more," he added.

The US military was seeking oil tankers on Friday to move diesel fuel to Diego Garcia in the Indian Ocean, site of a US Air Force base.

It has booked another tanker to move jet fuel from Greece to southern Spain, ship brokers said.

Adding to the tension, Afghanistan's Taliban government, which has denied involvement in the attacks, vowed revenge if the United States bombed the impoverished central Asian country.

The New York Mercantile Exchange, which trades benchmark US oil futures, was closed after the terror attacks on New York and Washington that left thousands feared dead.

The US Congress neared an agreement on Thursday giving the president its approval to launch military strikes in retaliation for the attacks against New York and Washington.

Secretary of State Colin Powell became the first senior official to publicly identify Saudi-born dissident Osama bin Laden as a suspect for the attacks, but bin Laden aides denied he was involved.

The US has built support internationally for a military reprisal, although Defense Secretary Donald Rumsfeld said the United States had yet to decide if bin Laden was to blame.

International affairs experts have said the United States could lose some Arab support if it staged a massive bombing campaign on impoverished Agfhanistan, where bin Laden lives as a guest of the Taliban government.

"It is generally viewed as a certainty that the United States will respond to this attack in some fashion, and there is a small fear that it may lose some Middle Eastern support as a result," said Lawrence Eagles of brokers GNI.

Cartel kingpin Saudi Arabia said it backed the United States in its fight on terrorism, and said it was ready to cover any eventual shortfall in oil supply with its Opec partners.

Brent oil is about nine percent above its level before the attacks but still below the $US31.05 per barrel it touched in panic buying on Tuesday immediately after the attacks.

Opec Secretary-General Ali Rodriguez said on Friday that military reprisals could lift oil prices in the very short term, but the damage done by Tuesday's attacks to US consumer confidence would hit global demand growth in the medium term.

"If there are military strikes on a country that has helped in these attacks, it could increase oil demand for a while," Rodriguez said.

"But on the other hand, if investor confidence falls, then there could be a real recession," he added.

Opec would watch the market closely for the next two weeks before deciding what action to take at its next meeting on September 26, he added.

Opec's reference oil price stood at $US26.23 per barrel on Thursday, still well below the upper limit of its $US22-$US28 target range.

The United States was expected to be the main engine of oil demand growth over the next year, but analysts also began to downgrade their forecasts for oil demand next year.

Morgan Stanley's chief economist, Stephen Roach, sent an emotional note to clients after this week's events.

"This shock, in conjunction with a very ominous set of fundamentals, is a lethal combination for the American consumer," said Roach.

"This tragedy could well be the tipping point to the recession of 2001."

As a result he saw an even greater chance of a sharper global slowdown, lowering his call for world growth this year to just 1.5 per cent from 2.0 per cent.

- REUTERS

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