Oil Rises a Third Day; Gaza Attacks Threaten Mideast Stability

Jan. 5 (Bloomberg) -- Crude oil rose for a third day in New York after Israeli troops entered the Gaza Strip, escalating the 10-day old conflict and threatening stability in the Middle East, the largest oil-producing region.

Oil gained as much as 5 percent after thousands of Israeli troops crossed the border Jan. 3 to capture bases Hamas militants have used to launch rocket attacks on the country. Arab nations and the international community must do more to support Gaza's population, Tehran-based Press TV reported Iran's Foreign Minister Manouchehr Mottaki as saying yesterday.

``This has got the market nervous,'' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. ``There's always a chance that the violence could widen. Because the Mideast is the number one producer of crude this tends to provide support to oil.''

Crude oil for February delivery rose as much as $2.34, or 5.1 percent, to $48.68 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $47.17 a barrel at 11:33 a.m. Singapore time.

The contract gained 3.9 percent to $46.34 a barrel on Jan. 2, the highest settlement since Dec. 11. Prices climbed 23 percent last week, the most since August 1986, buoyed by the Gaza conflict, a natural gas dispute between Russia and Ukraine, and a rebound in equity prices. Oil tumbled 27 percent the week before.

Prices are being driven by ``that worst-case scenario,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``What if it drags in a few neighbors and leads to a broader conflict?''

The Middle East accounts for almost a third of the world's oil production. Prices jumped to a then-record $78.40 a barrel in July 2006 after Israel attacked Iranian-backed Hezbollah forces in Lebanon. Iran is the fourth-largest oil producer.

Market Reaction

While no production is at risk in the latest conflict, a market reaction is inevitable, even if it's been more than 30 years since war there last cut supplies, National Australia's Burg said.

Oil surged in 1974, helping spur a recession in the developed world, after an oil embargo that followed the Arab- Israeli war in October 1973.

Brent crude oil for February settlement rose $1.81, or 3.8 percent, to $48.71 a barrel on London's ICE Futures Europe exchange. It was at $47.48 a barrel at 11:33 a.m. Singapore time. The contract gained 2.9 percent to settle at $46.91 on Jan. 2.

Cease-Fire Expired

U.S. Secretary of State Condoleezza Rice canceled a planned visit to China this week to monitor events in the Middle East, the State Department said.

Israel has resisted international calls for a halt in hostilities, saying it needs to shut down the military wing of Hamas. The Islamic refused to renew a six-month cease-fire that expired on Dec. 19, citing Israel's economic blockade of the province.

Oil fell 54 percent last year, the first annual drop since 2001, and the biggest loss since trading started. Prices reached a five-year low of $32.40 on Dec. 19, and had probably fallen too far given the long-term outlook, National Australia's Burg said. The absence of many traders and investors on holidays may have added to the volatility in prices, he said.

Cushing Inventories

Crude oil in New York is trading at a discount to Brent as a result of a surge in inventories at Cushing, Oklahoma, said Mitsubishi's Nunan. Storage tanks near the town are the delivery point for futures contracts on the New York Mercantile Exchange.

Cushing supplies in the week ended Dec. 26 were at 28.1 million barrels, said the U.S. Energy Department on Dec. 31. That's down slightly from 28.6 million the previous week, the most the Department has ever reported.

``Cushing stockpiles are out of control,'' said Mitsubishi's Nunan. ``They've increased the capacity there so we're not at tank top but we can't be far from it.''

The surplus of crude may exacerbate the so-called contango structure in oil prices, where futures for prompt delivery are cheaper than those for later, he said.

``If you think there won't be a shortage of crude in the next couple of months and your storage is full, you'll have to dump the oil at whatever price,'' said Nunan. ``So I think we'll continue to see this steep contango, which means the front month could test the lows again near expiry.''