Oil Markets on Edge Over Middle East Events

DUBAI – Iran's nuclear stand-off with the West, Iraq's insurgency and an aging leadership in top Gulf producers have kept oil markets on edge over the stability of a region that supplies a fifth of global oil needs.

Analysts say a dependence on oil revenue and ties with the United States should go some way to ensuring supplies from the Gulf states, but Iran and Iraq are wildcards.

"The banner flying over the region is one of instability and uncertainty," said Mustafa Alani, an analyst at Dubai-based Gulf Research Centre.

"There is the security environment with the possibility of confrontation with Iran .... and the question of continuity within political systems in the region," he said.

Saudi Arabia, the world's largest oil exporter, and fellow OPEC producers Kuwait and the United Arab Emirates — all key U.S. allies — are expected to become more important to oil consumers.

Recent transfers of power in these Gulf states have gone smoothly but the future is less certain with the emergence of new contenders in the large ruling families.

Kuwait's ruler Sheikh Saad al-Abdulla al-Sabah, named as the new emir on Sunday, is 76 and ailing. His prime minister and likely heir, also in his 70s, has a pacemaker. In Saudi Arabia, King Abdullah and Crown Prince Sultan are both in their 80s.

"The ageing leadership may lead to political instability but it does not affect oil stability because these countries live on oil, it is their mainstay," said Muhammad-Ali Zainy, senior energy analyst at UK-based Centre for Global Energy Studies.

Kuwaiti analyst Kamel Harami agreed: "The leaderships have maintained oil policy and it has been very consistent."

Soaring oil prices have fuelled the energy-dependent economies of Gulf states which are trying to cope with a growing young population.

Kuwait and Saudi Arabia have repeatedly vowed to keep oil markets well supplied and invest to boost their output capacity.

The Gulf region controls nearly half of global oil reserves. The United States is the world's biggest oil consumer.

"There will be no (future) change in Gulf policy towards the U.S., and with the Iran and Iraq crises I believe they will more openly attach themselves to the United States," Alani said.

"I believe the oil markets have to worry far more about confrontation with Iran and the situation in Iraq," he added.

IRAN, IRAQ WILDCARDS

The United States and the European Union want Iran referred to the U.N. Security Council over its nuclear programme which they suspect is aimed at developing weapons.

Iran denies the charge and has warned the West that oil prices would rise sharply if punitive sanctions were imposed.

"We have the necessary tools to defend our rights. Those who use harsh language against Iran need Iran 10 times more than we need them," President Mahmoud Ahmadinejad said on Saturday.

Sunni Muslim-led Gulf Arab states have voiced concern over Shi'ite Iran's nuclear programme and growing influence in Iraq, where Shi'ites gained power after the ouster of Saddam Hussein.

Insurgents in Iraq have waged a bloody campaign against U.S.-led forces and the Iraqi government, repeatedly sabotaging oil infrastructure in the north to frustrate efforts to revive the country's energy sector.

Iraq, which sits on the world's third biggest oil reserves, has struggled to increase its oil output since the 2003 U.S.-led invasion. Most foreign firms are holding back from investing until there is a proper legal framework and security improves.

"The real threat to security of supply will come from terrorist attacks, wars and such incidents," Zainy said.

Although Saudi Arabia and Kuwait have faced al Qaeda-linked violence, analysts say militants will find it hard to attack heavily-fortified, key oil infrastructure there.