Iraqi rebuff sends oil price higher

Tariq Aziz: "The return of inspectors will not solve the problem"

Oil prices have surged after Iraq rejected demands to readmit UN weapons inspectors, raising the threat of fresh conflict in the Middle East.

The price of the key Brent crude future added $0.58 to $28.31 a barrel, while US crude soared $0.93 to $29.78.

The rises followed comments from Iraq's deputy prime minister, Tariq Aziz, saying that his country would not open up its arsenals to unconditional checks by the UN.

"The return of inspectors without conditions will not solve the problem ...because we have had a bad experience with them," Mr Aziz told Dubai-based satellite station MBC.

"Is it clever to repeat an experience that failed and did not prevent aggression?"

Embargo threat

The comments came a day after US President George W Bush warned that action against Iraq would be "unavoidable" unless Iraq complied with UN resolutions.

Mr Bush's speech raised hopes that US strikes on Baghdad could be avoided by Iraqi concessions, prompting a fall in oil prices on Thursday.

But, with the White House condemning Mr Aziz's comments as evidence that Iraq "had something to hide", traders prepared for a conflict which could affect supplies from one of the world's most important oil producing regions.

Nauman Barakat, a trader at Fimat International Banque, described Friday's oil price rebound as an "Aziz rally".

"Because Iraq is not succumbing to US pressure... obviously the hostilities become more of a reality," Mr Barakat said.

The Gulf region pumps about a quarter of global oil supply.

Fears have grown that some of Iraq's neighbours might block exports in sympathy with Baghdad.

'War premium'

Observers have warned that a rising oil price could undermine the world's fragile economic recovery.

But GNI analyst Lawrence Eagles said that, by gaining international support for strikes against Iraq, Mr Bush could avoid the threat of embargos and a squeeze in oil supplies.

"In other words, if Bush can gain a UN resolution ... there is little reason for any 'war premium' in the oil price," Mr Eagles said.

Some traders believe the threat of war has added up to $5 per barrel to oil prices.