Oil prices zoomed to a four-and-a-half month high above US$68 a barrel on Friday, rallying on supply fears tied to Iran's tense diplomatic standoff with the West over its nuclear ambitions.
Labor unrest in oil-rich Nigeria and new threats from al-Qaeda contributed to traders' jitters at a time when global petroleum demand is high and the emergency supply cushion is thin, leaving little room in the event of an output disruption.
Analysts said speculative buying by hedge funds and commodity funds also buoyed crude futures, which settled at their highest level since Sept. 1, just days after Hurricane Katrina made landfall in the US.
The fear of new supply disruptions outweighs the knowledge that crude-oil inventory levels are at multiyear highs and that winter temperatures in the US have been above-normal, keeping demand for home-heating fuels low.
"The market is just gripped with anxiety about Iran," oil broker Andrew Lebow of Man Financial in New York said.
"It's also concerned about Nigeria, where we actually have lost barrels. And we've also lost export barrels from Russia because of cold weather in Siberia that is driving up demand," he said.
Lebow added that the market is "completely decoupled" from the fundamentals of supply and demand.
On Thursday, energy traders brushed off a US government report that showed rising domestic inventories of oil and gasoline and sent crude futures their highest close in four months.
Light sweet crude for February delivery rose US$1.52 to settle at US$68.35 on the New York Mercantile Exchange. The February contract expired on Friday.
Brent crude for March delivery settled at US$66.43 a barrel on London's ICE Futures exchange, up US$1.20.
Nymex heating oil rose more than US$0.07 to US$1.8672 a gallon (3.8 liters), while gasoline gained more than US$0.04 to US$1.817 a gallon.
Tom Kloza, an analyst at Oil Price Information Service in Wall, New Jersey, said the retail price of gasoline will most surely rise higher in the weeks ahead and he predicted that US$2.75 a gallon will be a reality for many US motorists by May.
Natural gas futures advanced in sympathy with the surge in crude because some industrial users have the ability to switch between the fuels. Nymex gas futures gained US$37.5 to US$9.28 per 1,000 cubic feet (28.3m3).
International pressure has been mounting on Tehran to turn away from resuming uranium enrichment, which it claims is for energy. The US and key European nations, which fear Iran wants to make weapons, have pushed for a referral of the issue to the UN Security Council. Iran insists its plans for enrichment are only to produce nuclear energy.
On Thursday, Royal Dutch Shell PLC confirmed the death of a second catering contractor in an attack by armed militants on an oil platform in southern Nigeria, raising the death toll to 14. The series of attacks, including the rupture of a major Shell pipeline in the region, has forced the oil giant to evacuate more than 300 workers from four installations deemed vulnerable to attacks. The company cut production by 221,000 barrels a day as a result.
"Events in Nigeria appear to represent a significant and dangerous break from previous events, although we still see Iran as representing the major political risk to oil prices this year," Barclays Capital said.
Adding to the so-called terror premium for crude was an audiotape released on Thursday in which Osama bin Laden warned that his fighters are preparing new attacks in the US. The tape was the first from the al-Qaeda leader in more than a year.
Meanwhile, OPEC on Friday lowered its estimate for world oil demand in 2006 by 100,000 barrels a day to 84.83 million barrels a day.
When oil prices fell below US$60 a barrel last month, OPEC members talked of a possible need to trim output. But analysts say such a move would be highly unlikely with prices near US$70 a barrel.
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