15.07.2006 Business & Finance

Oil Prices Hover Above $78 Per Barrel

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LONDON - Oil prices topped $78 per barrel Friday and held near record highs as intensifying violence in the Middle East raised concerns of possible supply disruptions.

Israel widened its offensive on Lebanon on Friday, with warplanes blasting the airport for a second day, igniting fuel storage tanks and cutting the main highway to Syria.

Hezbollah has fired more than 100 rockets into Israel, which said one also struck the port city of Haifa. More than 51 people have died in two days of violence following the capture of two Israeli soldiers by Hezbollah militants.

The escalating violence pushed prices higher, helped by rising global demand and fears that supplies from major producers including Iran and Nigeria could be interrupted. There are also concerns about the risks hurricanes pose to U.S. production.

"We are certainly in uncharted territory," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "I wouldn't be surprised if $80 is attained soon with this slew of geopolitical events in a tight market."

While Israel and Lebanon are not involved in the Middle East oil market, the fear is that the conflict could expand in the region, which produces nearly a third the world's oil and has almost two-thirds of its untapped reserves.

"This violence has eclipsed the drop in U.S. inventories, Iranian nuclear dispute and the further disruption to Nigerian production," said Paul J. Harris, head of energy & emissions at Bank of Ireland Global Markets in Dublin, Ireland.

Light sweet crude for August delivery was as high as $78.40 a barrel in trading on the New York Mercantile Exchange. By midmorning in Europe, however, the price was $77.45, up 75 cents from Thursday's record settlement of $76.70 a barrel.

Brent for August delivery at London's ICE Futures exchange, which expires at the close of trading Friday, jumped as high as $78.03, but then fell back to $77.46, up 77 cents from Thursday's close.

"We haven't even taken into account a potential hurricane in the United States, so getting to $80 and beyond this summer seems quite inevitable," Shum said. "But if these Middle East events somehow get resolved, prices could also drop sharply."

The previous Nymex settlement record of $75.19 was set July 5. The previous intraday record of $75.78 was posted two days later.

Gasoline futures climbed 2.3 cents to $2.3245 a gallon, heating oil futures rose 3 cents to $2.1103 a gallon and natural gas futures advanced 10 cents to $6.230 per 1,000 cubic feet.

The surge in oil prices rattled financial markets, with Japan's Nikkei 225 index falling 1.7 percent Friday, while the Dow Jones industrial average dropped 1.5 percent on Thursday.

Meanwhile, Iran has threatened on more than one occasion to use oil as a weapon if the United Nations uses economic sanctions or some other punishment in its dispute with Tehran over its nuclear program. While OPEC's No. 2 supplier has not raised the issue of withholding oil from the market in a sign of solidarity with Hezbollah, the possibility is no doubt influencing oil traders' actions.

In Nigeria, government officials said twin explosions hit oil installations belonging to an Italian oil company in the volatile southeastern delta region. Elsewhere, militants attacked a group of 11 boats carrying supplies to Chevron's offshore oil fields Wednesday, killing four navy sailors who were escorting the convoy, Brig. Gen. Alfred Ilogho said Thursday.

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