Oil prices flat despite conflict in Middle East

[sajiv]

Crude prices were essentially flat Monday despite a widening conflict between Israel and Palestinian militants and evidence of OPEC crude output cuts.

Prices spiked as much as 7 percent in early trading with analysts expecting light volume during the final three days of 2008, which can lead to price swings.

Light, sweet crude for February delivery rose 31 cents to $38.02 a barrel on the New York Mercantile Exchange, which will be closed Thursday for the New Year's Day holiday. The contract on Friday rose $2.36 to settle at $37.71.

Retail gasoline prices in the U.S., however, continued to fall and neared $1.60 per gallon nationally Monday.

In the Middle East, Israel destroyed symbols of Hamas power on the third day of what the defense minister described Monday as a "war to the bitter end." The three-day death toll rose to at least 315, with some 1,400 wounded. Israel launched its campaign, the deadliest against Palestinians in decades, on Saturday in retaliation for rocket fire aimed at civilians in southern Israeli towns.

"There could be fear that an escalating Middle East conflict could disrupt supplies, though I don't see that happening at this point," said Gerard Rigby, energy analyst with Fuel First Consulting in Sydney. "(Israel-Palestinian conflict) always causes a bit of a blip and is one component that could support prices short-term."

There were also hints from China the government could go on a crude-buying spree to take advantage of prices below $40 per barrel. A senior government official writing in the People's Daily said China wants to increase its oil reserves to cushion supply shocks that it believes are inevitable.

China is encouraging companies to use all spare petroleum storage capacity to take advantage of the current low prices, the official said.

Asia's biggest refiner, the state-owned China Petroleum & Chemical Corp., recently completed construction of its largest storage project, a 38-tank facility with a total capacity of 32.4 million barrels.

In Vienna, JBC Energy, in its daily newsletter, said "the UAE has decided to reduce crude supplies in January and February in line with the OPEC production cuts." The United Arab Emirates are the fourth-largest producers in the 13-nation cartel.

Analysts at the U.S. firm Cameron Hanover noted Monday the UAE, unlike a number of other OPEC members, typically abides by planned cuts.

"If OPEC countries actually cut all of the output they have agreed to cut, global supplies of crude will be tighter come spring," Cameron Hanover said.

Oil prices have fallen 73 percent since peaking at $147.27 a barrel on July 11 as a credit crisis in the U.S. sparked a steep drop-off in consumer demand and corporate earnings. And analysts expect more dismal economic news from the fourth quarter over the next few weeks.

"More bad profit reports, jobs reports, housing results will put pressure on prices," Rigby said. "Once Obama comes in, that might start changing sentiment and generate more optimism." Barack Obama is scheduled to be sworn in as president on Jan. 20.

Tumbling crude prices have led to enormous declines in the price of retail gasoline.

At the pump, retail gas prices fell eight-tenths of a penny overnight to a new national average of $1.619 a gallon Monday, well below the year-ago average of $3.039 a gallon, according to AAA and the Oil Price Information Service.

A Shell station in suburban Houston was selling regular unleaded for $1.19 a gallon on Monday.

In other Nymex trading, gasoline futures fell less than a penny to 84.2 cents a gallon. Heating oil rose a half cent to fetch $1.25 a gallon, while natural gas for January delivery jumped 19 cents to $6.02 per 1,000 cubic feet.

In London, February Brent crude rose 43 to $38.80 a barrel on the ICE Futures exchange.