Oil surges on Iraqi supply threat

Iraqi plans to cut oil output regardless of support

The price of oil has jumped to a six-month high after escalating Israeli-Palestinian violence, and an Iraqi proposal to stop exports to the US.

Iraq called on all Arab producers to stop oil supplies to the US.

A barrel of benchmark Brent crude oil surged to $26.69 a barrel from $25.92 last Thursday, after the London market was shut for a four-day Easter holiday.

It is not easy to reach a consensus in Opec about the oil price, [never mind] about the use of oil as a weapon

Yusril Ihza Mahendra
Indonesian Justice Minister

The markets seized on comments by Iranian Foreign Minister Kamal Kharazi that the Iraqi proposal for Arab countries to stop supplies would be "effective if all Muslim countries would take such a decision".

Meanwhile, Israeli tanks and helicopter gunships bombarded the Ramallah headquarters of the Palestinian Authority security chief in the West Bank, while Israeli tanks advanced into Bethlehem.

"For traders, the general fear is that the violence could spread further unrest in the Middle East where two third of the world's petroleum reserves sit," said Lawrence Eagles, an oil analyst at the GNI brokerage in London.

Producers' response

Iran, the second biggest exporter in the Opec producers' cartel, had responded cautiously to the Iraqi proposal.

"The first thing is to put pressure on the US," Mr Kharazi told Reuters on the sidelines of the Organisation of the Islamic Conference (OIC) meeting in Kuala Lumpur.

Oil markets seized on Kharazi's cautious remarks

"If they decide to use oil as a weapon certainly Iran will consider it," he said.

The Iraqi idea was rejected by other OIC members and by Opec.

"It is totally out of the question that oil will be used as a weapon," an Opec source in Vienna said.

Saudi Arabia, the world's biggest exporter and Opec's most influential member has not commented on the Iraqi proposal.

Indonesia, the world's biggest Muslim nation and Asia's only Opec member, called the oil weapon "quite impossible".

"It is not easy to reach a consensus in Opec about the oil price, [never mind] about the use of oil as a weapon," Indonesian Justice Minister Yusril Ihza Mahendra said at the OIC.

Days gone by

The last time Arab oil producers implemented an embargo was in 1973, when crude prices quadrupled and badly damaged the US economy.

Mahendra: oil weapon "quite impossible"

Since then many Arab oil producing economies have become heavily dependent on crude oil revenues, making them wary of cutting supplies and earnings.

"There were times when the position of oil producing countries was quite strong when it was just the Opec and Middle East countries.

"The situation now is quite different from what it was in the 1970s," Mr Mahendra said.

The Opec cartel includes Iran, Kuwait, Saudi Arabia, United Arab Emirates, Iraq, Qatar, Algeria, Nigeria, Venezuela, Indonesia and Libya.

It supplies more than 20 million barrels per day (bpd) of the 76 million bpd world crude oil market.