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Last Updated: Tuesday, 16 October 2007, 19:40 GMT 20:40 UK
Oil reaches new records above $87
Oil refinery in Najaf, Iraq
Any potential threat to Iraqi oil output will affect the global market
Oil prices have hit record levels above $87 a barrel amid tensions between Turkey and Kurdish rebels in northern Iraq and output concerns.

In Tuesday trading, US light, sweet crude rose as high as $87.97 a barrel before easing back to $87.61, while Brent finished at $84.16.

The continued upward curve followed reports that Turkish forces had shelled an Iraqi border village in recent days.

With global supplies tight, any threat to oil output is likely to hit prices.

Economic impact

The Turkish government is preparing a motion seeking parliamentary approval for a military incursion into northern Iraq after 13 Turkish soldiers were killed close to the Iraqi border.

Ankara estimates that 3,500 Kurdistan Workers' Party (KWP) rebels - who want to see the establishment of an independent Kurdish homeland - are based across the border in Iraq.

All the factors in the market are bullish
Tetsu Emori, Astmax Futures

Analysts said Turkey's decision to ask for permission to pursue Kurdish rebels into Iraq fuelled fears that hostilities would disrupt oil supplies.

"Whenever there is any escalation in political tensions in the Middle East, oil markets become concerned," said a commodity strategist at the Commonwealth Bank of Australia.

Oil prices have quadrupled since 2002 due to demand from fast-growing economies such as China and India, allied to instability in oil-producing nations in the Middle East and Africa.

The cost of oil is still below the inflation-adjusted level of about $90 a barrel seen in 1980 when spiralling prices helped contribute to a recession in the US.

Analysts are divided over where prices will head next, although most believe the upward pressure on prices - driven by concern about the availability of supplies - is set to continue.

Predicting the future

Further pressure on supplies came with news that oil producers outside the Opec cartel were to reduce output by about 110,000 a day.

Last month, Opec said that it would be boosting its production by 500,000 barrels per day from the beginning of next month to cope with resilient global demand for oil.

However, it has since added that demand for oil this winter in the US - the world's largest consumer of heating oil - will be stronger than previously thought.

"It is very difficult to say what will happen next," said Tetsu Emori, commodity markets fund manager at Astmax Futures.

"All the factors in the market are bullish. There are no bearish factors except maybe that the market looks like it has been overbought, technically."



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