Oil rises on Middle East tensions

December 30, 2008

, SINGAPORE, December 30 – Oil prices remained above 40 dollars a barrel in Asian trade on Tuesday as Israel entered the fourth day of its military campaign against Hamas in the Gaza Strip.

At midday New York\’s main contract, light sweet crude for February delivery, rose 26 cents to 40.28 dollars a barrel, following a 2.31-dollar rise to 40.02 on Monday at the New York Mercantile Exchange.

Brent North Sea crude for February delivery was up five cents to 40.60 dollars a barrel after closing 2.18 dollars higher at 40.55 on Monday in London.

Prices were higher because of a "political risk premium" resulting from the Israeli-Hamas war but should drift lower on underlying weak demand for energy, said Jonathan Kornafel, Asia director of Hudson Capital Energy, a trading firm.

Israeli warplanes pounded Gaza again on Tuesday in what Tel Aviv called an "all-out" war on Hamas, which ended a ceasefire by firing rockets and mortars at the Jewish state.

The fighting fuelled fears of wider tensions in the oil-rich Middle East, traders said. Thin trade owing to the year-end holiday season also made for some price volatility.

Analysts said the price gains were additionally supported by evidence that the oil producers\’ cartel OPEC was cutting its output in line with an announcement earlier this month.

Previous OPEC production cuts have often been met with only partial compliance.

"Oil is starting to show some life as we head towards the end of the year," said Phil Flynn at Alaron Trading.

"A weak dollar and violence in the Gaza Strip are contributing but mainly this is year-end short covering," he said.

Short covering occurs when traders, who have sold more than they own in hopes that prices will fall, buy up the contracts as the market starts turning higher.

Monday\’s jump in oil prices sharply contrasted with recent trade. The New York contract had slid for nine sessions before reversing on Friday, while Brent posted its lowest price in more than four years last Wednesday.

Analysts say recent US economic data showing the world\’s biggest economy — and largest energy consumer — remains in a recession is likely to keep prices under pressure in the short term.

A sharp global downturn has slashed world demand for energy, pulling prices sharply lower from record highs of above 147 dollars in July.

New York crude plunged earlier this month to below 33 dollars, its lowest point for almost five years.

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