Oil Prices Rise on U.S.-Saudi Relations Fears

Oil prices over the world rose on Thursday ahead of a meeting between Saudi Arabia and the United States amid fears that their strategic relationship could be threatened by the deepening crisis in the Middle East.

In a pivotal meeting with President George W. Bush on Thursday, Saudi Crown Prince Abdullah was expected to voice Arab anger at Israeli incursions into Palestinian areas of the West Bank.

International benchmark Brent crude oil rose 19 cents to $25.95 per barrel by late afternoon in London, while U.S. crude futures added 42 cents to $26.80.

"A cooling in relations with the United States could mean that Saudi Arabia will be slower to intervene with more oil supply when prices are rising," said Roger Diwan of Petroleum Finance Corp in Washington.

Prices have already risen by a quarter in the last two months on fears that escalating violence on the West Bank could spill over to the Gulf region, home to two-thirds of world oil reserves.

The New York Times quoted a source close to the Crown Prince as saying that the Saudi royal would warn Bush that relations would be threatened if Washington fails to moderate its support for Israel.

The Times cited the source as saying that there has been talk in the Saudi royal family of using the "oil weapon" against the United States to put pressure on Israel to withdraw.

Saudi Arabia has officially ruled out joining any Islamic oil embargo of the West, after Iraq cut off exports on April 8.

Foreign Minister Prince Saud al-Faisal said last week in Moscow that oil was not a weapon in the conflict, and that the kingdom would continue oil production.

Saudi Oil Minister Ali al-Naimi said on Monday that the kingdom would fill any supply shortage in world markets, but that world inventory levels were still very good.

Industry monitors say there is no evidence that Saudi Arabia has lifted exports to cover the Iraqi stoppage, and big Western oil companies seeking extra cargoes have been turned away empty handed.

Iraq suspended exports to the West in protest at Israel's incursions, and Iran and Libya have said they would join any Islamic-wide embargo.

MORE OPEC OIL

Iraq's stoppage prompted the International Energy Agency (IEA), the West's energy watchdog, to call for more supply from the Saudi-led OPEC cartel to stop prices threatening a recovery.

OPEC, which controls two-thirds of world exports, has cut output by about 20 percent since January 2001 as it struggles to contain a slowdown in demand growth.

"We would like to see more oil in June," IEA executive director Robert Priddle told reporters in Paris. "We are in danger of an excessively tight market in the second half of the year if production is not restored."

OPEC's curbs, which have helped drive prices up but taken its market share to its lowest level since the 1980s, will be reviewed at the cartel's next meeting on June 26.

Priddle said if more countries joined Iraq's embargo it could have serious consequences on world markets.

"We will give them (OPEC) the opportunity to make good on continuity of supply, but if they don't the IEA countries have emergency supplies that can sustain eight million barrels per day for at least three to four months," Priddle said.

The world consumes 76 million barrels of oil daily.

The Paris-based IEA, an arm of the Organisation for Economic Co-operation and Development, was set up to protect the industrialised world against a repeat of the 1970s oil crisis and it monitors levels of oil in storage in its 26 member countries.

Priddle did not say by how much OPEC should raise output, but said it should be done progressively as the global economy was recovering more quickly than expected.

"Demand in the first quarter was very much lower, but we see a rapid recovery and we need to supply the economy in the second half of the year," he said.

High oil prices dampen growth by lifting oil prices at the pump and trimming company profits through bigger energy bills.