U.S. oil storms towards $37 as Iraqi fears ferment

By Andrew Mitchell

NEW YORK (Reuters) - U.S. oil prices ballooned to fresh decade highs on Monday as rising tension in the Middle East put traders on red alert over possible supply disruptions from key exporter Iraq this winter.

October crude on the New York Mercantile Exchange bolted to a fresh high of $36.80 a barrel, up nearly 90 cents, as concern grew that Iraq could disrupt its supplies in the run-up to November's U.S. presidential election.

Traders rushed to buy after a warning from Iraqi President Saddam Hussein that fellow OPEC member states should ignore pressure mounted by ``superpowers'' on producers to rein in runaway prices.

``The superpowers will fasten their grip on oil producing countries,'' the Iraqi press quoted Saddam as telling a cabinet meeting late on Sunday. By 1135 EDT NYMEX crude was at $36.78 a barrel, up 86 cts.

Tensions in the Middle East have been running high since Baghdad last week renewed allegations that Gulf neighbor Kuwait was stealing its oil -- the precise charge that triggered Iraq's invasion of the emirate in 1990.

U.S. Defence Secretary William Cohen said on Sunday the United States is watching Iraq closely. ``Our forces stand ready. We are enforcing the no-fly zones in the north and south, watching very carefully,'' he said.

Rising Iraqi production over the near four years of its U.N. oil-for-food deal -- now around three million barrels per day (bpd), or four percent of world supply -- means even the threat of a halt to its output will have tight world oil markets at panic stations.

Winter heating needs are the biggest U.S. worry with stocks running 40 percent below last year and analysts worrying that an early cold snap could spark a price scare far worse than the Northeast suffered earlier this year.

Despite Washington's hard diplomatic line towards Baghdad, Iraq is now the sixth biggest oil supplier to the United States, making the world's biggest consumer especially vulnerable with crude oil stocks hovering near 24-year lows.

``Any further fuss from Iraq or a drop in API crude stocks would add more fuel to the fire,'' said Tim Evans, senior analyst at IFR-Pegasus in New York.

``On that score, I think refiners may be reluctant to build stock at the moment both on account of refinery turnarounds that will limit processing anyway and in hopes that greater supply going forward will mean lower prices.''

Fearful the higher energy costs could revive inflation and slow global economic growth, consuming countries have chorused that producer group OPEC must release more supply to bring prices down.

But after the group last month released 800,000 bpd of new supply, bringing total increases this year to 3.2 million bpd or 14 percent of its production -- only Saudi Arabia now has substantial spare capacity to raise output.

A Saudi Arabian source said on Monday that OPEC's leading supplier expects the oil producers' group to raise production before its November 12 extraordinary meeting if prices keep raging at current high levels.

``If prices stay as high as they are, there is no doubt that OPEC will reach an agreement to increase production. There is no doubt it will happen,'' the Saudi source said.

The cartel says it can add more oil if necessary under a price stability mechanism that could bring an extra 500,000 barrels a day by the end of October. Oil prices have risen three dollars since OPEC's latest output rise last week.

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-- Carl Jenkins (Somewherepress@aol.com), September 18, 2000