Oil Prices Hold at Two-Year High on Supply Fears

Oil held strong near two-year highs on Wednesday after the U.S. government said national crude inventories had slumped to the lowest level in 27 years.

U.S. light crude was up a cent at $35.45 a barrel, after setting a fresh peak $35.95 a barrel in early trade. London Brent slipped eight cents to $32.29.

Evidence that a blast of Arctic weather has further eaten into tight U.S. fuel and crude stocks kept the heat under prices that are now little more than $5 off all-time peaks set when crude spiked after Iraq's invasion of Kuwait 12 years ago.

U.S. crude stocks dipped 4.5 million barrels last week to their lowest since 1975 because of export disruptions from Venezuela, where an oil workers' strike is in its 11th week, the U.S. government's Energy Information Administration said.

Distillate supplies, including heating oil, fell 3.9 million barrels and stand 20 percent lower than a year ago.

With the United States expected by traders to launch an assault on Iraq within weeks, some in the market fear a further price spike.

"On the latest available data, oil inventories are currently lower than normal by about 60 million barrels in Japan, 65 million barrels in Europe and 70 million barrels in the USA," said analyst Paul Horsnell at JP Morgan.

"It must be said that this does not represent a particularly secure base for entering what are perhaps the most geopolitically uncertain few months there have been for some 40 years."

With Venezuela's output still less than half its previous three million barrels a day, and a potential Middle East outage looming, traders are on high alert for further shortages.

Nigerian white-collar oil workers are threatening to start a strike on Friday in a dispute with the government over pay and conditions that could close export terminals from the OPEC member.

The International Energy Agency, the industrialised world's energy watchdog, heightened fears of a crunch with a report showing that spare capacity from OPEC might not be sufficient to cover a disruption of Iraq's supply.

"It is clear that there could be little surplus supply in the system if Iraqi or other Arab Gulf supplies go down any time soon and Venezuelan supply remains constrained," the Paris-based group said in a monthly report released on Wednesday.

Baghdad produces about 2.5 million barrels a day and exports up to two million, an amount that may not be easily made up by other OPEC producers with spare capacity of only 2.28 million bpd, the IEA said in its report.

The agency which represents 26 industrialised nations stands ready to order a release from consumer country emergency stockpiles should OPEC fail to fill the gap. So far it has made no commitment either way, saying it would prefer OPEC to manage any disruption if possible.

Despite a growing rift with European powers France, Germany and Russia, the United States continues to press its case for military action to unseat Iraqi President Saddam Hussein, whom it accuses of hiding weapons of mass destruction.

Top U.N. weapons inspectors are due to report to the United Nations Security Council on Friday on their efforts to assess Iraq's weapons programmes, a presentation that Washington has described as "pivotal" in deciding whether to go to war.

Brokers said heightened alerts of possible terror attacks in Britain and the United States following the release of an audio tape believed to have been recorded by Osama bin Laden also helped support prices.

Washington pounced on the bin Laden broadcast as evidence of an alliance between the al Qaeda network and Baghdad despite the tape condemning Saddam as an infidel.