World oil prices hit fresh two-year highs Friday as US Secretary of State Colin Powell forecast that within two weeks there will be a persuasive case that Iraq is not cooperating with UN weapons inspectors.
Crude oil futures in New York rose 25 cents to $33.91 a barrel, briefly touching $34.00, just above two-year highs struck on Thursday. Brent crude in London was down four cents at $30.54 a barrel.
Prices have jumped more than two dollars, or 9 per cent, this week as a 47-day oil workers strike in big exporter Venezuela runs down US crude inventories, leaving world markets more vulnerable to a halt in Iraqi supply.
Powell's comments deepened fears of military conflict in Iraq -- the world's eighth biggest oil exporter -- after Jan 27, when UN weapons inspectors in Iraq are due to report their findings back to the Security Council.
"He (Powell) said...we believe a persuasive case will be there at the end of the month that Iraq is not cooperating," State Department spokesman Richard Boucher told reporters in Washington.
Chief UN weapons inspector Hans Blix has said Baghdad needs to submit credible evidence that it has no weapons of mass destruction, or face war.
A top analyst at Goldman Sachs investment bank said world oil markets face the largest shortfall in history if war breaks out in Iraq while supplies are still curtailed from Venezuela.
"In terms of barrels per day this (Venezuela) is one of the larger shocks we've ever had. Only the Gulf War, the Iran-Iraq war and the Arab-Israeli war in 1973 represented similar ones," Steve Strongin, managing director in charge of commodity research, said on a conference call.
Venezuela normally accounts for 13 per cent of US oil imports, but the strike has cut the South American country's oil exports to a fifth of normal levels. US crude stocks have already fallen near their lowest level in more than two decades.
"If you threw in a two-month interruption to Iraqi crude for political, military, (or) whatever reason, that would be enough to turn it into the largest shortfall in history," Strongin added.
Strongin said prices could go above $40 a barrel, a level economists warn that if sustained could cause severe damage to world economic recovery. US crude are already within four dollars of post-Gulf War highs struck in September 2000.
Oil dealers are worried that any loss of Iraqi exports could stretch to the limit the spare capacity of OPEC oil producers, who pump around a third of the world's oil.
OPEC at an emergency meeting last Sunday raised formal output quotas by 1.5 million barrels a day, but among the 11-member cartel only Saudi Arabia and the UAE have any substantial spare capacity.
US crude stocks are currently less than one per cent, above the level where the government warns there could be localized disruptions at refineries, forcing them to cut gasoline and heating oil supply.
Despite fears of a gasoline price spike as demand rises for the summer vacation season, the US government on Friday reiterated that it has so far saw no need to release emergency stocks from the US Strategic Petroleum Reserve.
"In the end you're going to have to use the SPR to deal with this," Goldman Sachs' Strongin said.
