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Oil near $40 as investors eye Gaza conflict

world Updated: Dec 30, 2008 13:37 IST

AP
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Oil prices hovered near $40 a barrel Tuesday in Asia on investor concerns the conflict between Israel and Hamas could further heighten tensions in the oil-rich Middle East. Light, sweet crude for February delivery fell 16 cents to $39.89 a barrel in electronic trading on the New York Mercantile Exchange by late afternoon in Singapore. The contract overnight rose $2.31 to settle at $40.02.

Hamas sent missiles deep into Israel on Monday, three days into Israel's punishing air offensive in Gaza. Four Israelis, including a soldier, were killed and eight wounded. Palestinian health officials put the three-day death toll in Gaza at 364; the U.N. said the total included at least 62 civilians.

Early Tuesday, Israeli aircraft dropped at least 16 bombs on five Hamas government buildings in a Gaza City complex, destroying them, witnesses said. Israel's defense minister Ehud Barak promised a "war to the bitter end against Hamas" and allied militants. Crude prices have rallied 14 percent since Friday on concerns that the conflict could heighten tensions between Middle East oil power Iran and Israel and the U.S., said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore. "The danger is Iran getting involved," Kornafel said. "Any tension in the Middle East is going to involve the whole region." "This problem isn't going to go away overnight. It's been a big disaster."

Expectations that a slowing global economy will dampen crude demand have helped contain the rally in oil prices. If the Israel-Gaza conflict doesn't escalate, prices could break below $30 during the next few months, Kornafel said.

"I don't expect any positive surprises for GDP, housing data, jobless claims, or manufacturing data," he said. "It's all going to be negative for at least the next couple months." Oil prices have fallen 73 percent since peaking at $147.27 a
barrel on July 11.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months. However, investors are skeptical the 13-nation group will adhere to the new output quotas.

"The market is looking for compliance," Kornafel said. "OPEC needs to show they are sticking to these very pronounced cuts they've already announced."

In other Nymex trading, gasoline futures rose 0.15 cent to 88 cents a gallon. Heating oil fell 0.83 cent to $1.28 a gallon while natural gas for February delivery was steady at $6.08 per 1,000 cubic feet.

In London, February Brent crude fell 11 cents to $40.44 a barrel on the ICE Futures exchange.