Oil prices up since Mideast conflict; embargo unlikely

LONDON -- U.S. crude prices have jumped by 36 percent since the beginning of February, and motorists are likely to see higher prices at the pump as the peak summer driving season approaches, energy analysts said Wednesday.

The worsening conflict between Israel and the Palestinians continues to roil world markets, although several analysts said a possible Iraqi-led oil embargo against the United States, Israel's main ally, would almost surely fail.

Crude futures prices dipped after spiking to six-month highs on Tuesday, when Iraqi Foreign Minister Naji Sabri declared in Kuala Lumpur, Malaysia, that Arab countries have the right to coordinate their policies in order to put pressure on Israel and its defenders.

Fresh data from the American Petroleum Institute showing an unexpected buildup in U.S. inventories of oil and gasoline deflated some of the concern about a potential Iraqi disruption in crude exports.

May contracts of light, sweet U.S. crude were 19 cents lower at $27.52 a barrel in afternoon trading on the New York Mercantile Exchange. In London, contracts of North Sea Brent crude were down 38 cents at $27.28 a barrel on the International Petroleum Exchange.

Ali Tahghighi, an analyst at Barclays Capital, said prices should stabilize, barring a major escalation in tensions in the Middle East -- home to two-thirds of the world's proven oil reserves.

"I think prices are a bit overdone right now," he said. "I don't think the possibility of a disruption justifies a continued increase like the one we've seen in the past few weeks."

As of the close of business Tuesday, U.S. crude futures had surged by 36 percent since Feb. 1.

The increase is even steeper if measured from when crude futures bottomed after the September terrorist attacks. U.S. front-month futures for light, sweet crude have ballooned from an intraday low of $16.70 a barrel on Nov. 19 to a high Tuesday of $28.10.

"We think the price is really too high for the fundamentals, the economic side of the argument," said Leo Drollas, chief economist at the Center for Global Energy Studies.

Taken by themselves, the physical supply and demand for oil would suggest an average price for Brent crude of $23.50, he said. Drollas argued that the Israeli-Palestinian conflict together with uncertainty about Iraqi supplies has added "a Middle East premium" of $3 to each barrel.

Costlier crude is filtering through to the pump. Drollas estimates that the U.S. retail price for unleaded gasoline was 20 percent higher on March 21 than for its average in February.

"The price is not as good as it was two months ago, but it's still not going to be horrific," said Peter Gignoux, head of the petroleum desk at Salomon Smith Barney. He noted that production of gasoline has increased and that retail prices are still lower than last year.

Gignoux also scoffed at the idea that Iraq would be able to organize an effective oil embargo. Iran's Foreign Minister Kamal Kharrazi said in Malaysia that such a boycott could work if it had backing from many oil producers.

"An Iraqi-led oil embargo just doesn't impress me at all," he said. "The 'short-term-ism' that we're seeing in this market -- this rally -- is based on a few comments by some of the world's most unreliable leaders."

White House spokesman Ari Fleischer expressed a similar skepticism.

"The two states that have said something about this topic are Iran and Iraq," Fleischer said. "They have not been met with agreement anywhere in the Arab world."

Middle Eastern oil producers last imposed an embargo on the West in 1973, as a result of an Arab-Israeli war. Since then, the world's wealthiest nations have created the International Energy Agency to provide a 4 billion barrel cushion against any similar disruption.

If Iraq did lead an embargo, analysts said, non-Arab producers such as Russia, Mexico and Norway would likely pump more oil, as would Saudi Arabia, the world's largest crude producer and exporter, which would not want to jeopardize a recovery in the global economy.