Oil Stabilizes After Flirting With $40 Level

Jumpy oil prices paused for breath on Friday after a rollercoaster ride that saw U.S. crude brush $40 the previous day, with the looming prospect of war in Iraq underpinning the market amid heated debate at the U.N.

U.S. light crude futures eased 35 cents to $36.85 a barrel. Benchmark Brent was up 20 cents at $33.24 a barrel.

Fears of war in Iraq and a slump in stocks of heating fuel in the United States shot crude to $39.99 a barrel at one point on Thursday, within range of a record high $41.15 struck in October 1990 after Iraq invaded Kuwait to prompt the Gulf War.

Prices were cooled by a heavy bout of profit-taking, but remain up more than $6, or 20 percent, since the start of the year amid fears a war could stop Iraq's two million barrels a day of exports -- or more if it engulfs nearby producers.

Iraq said on Friday it would obey U.N. orders to destroy its ballistic missiles and could start doing so on Saturday, but the United States and allies accused Baghdad of playing games over disarmament.

In Baghdad, Iraqi sources said the government had told chief U.N. weapons inspector Hans Blix it would obey his order to destroy its al-Samoud 2 ballistic missiles and could start dismantling them on Saturday -- the deadline he had set.

U.N. inspectors in Baghdad said they would hold technical talks with Iraq on Saturday, after which the destruction of the missiles could begin.

Blix, however, in a crucial report to the U.N. Security Council, criticised Iraq for giving a "very limited" response to its disarmament obligations.

In a leaked draft, Blix said the results of three months of inspections had been problematic. "Iraq could have made greater efforts to find any remaining proscribed items or provide credible evidence showing the absence of such items," he wrote. "The results in terms of disarmament have been very limited so far."

Security Council members argued bitterly on Thursday over whether to approve a war on Iraq, with veto-wielding permanent members deeply divided and smaller nations -- under mounting pressure from both sides -- urging them to seek unity.

President Bush has said he is prepared to use force if necessary without U.N. backing.

"Political developments still suggest that the U.S. is not going to change its movement towards war with Iraq, and the real question is whether Blix's latest report will sway any permanent members to support the U.S. position," said GNI-Man research analyst Lawrence Eagles.

OPEC is likely to establish a war contingency plan at its March 11 meeting that would suspend oil output quotas once hostilities start, senior officials and OPEC sources said on Friday.

But the producer group that dominates world oil trade is very unlikely to lift output restrictions simply to contain prices before the meeting, they said.

"The price now is not due to any shortage or fundamentals, its psychological," said one.

While no formal proposal is yet in circulation, the sources said ministers are expected to put a plan in place for a temporary suspension of output limits at the Vienna gathering in two weeks' time.

"There is no proposal for this yet," Indonesian Energy Minister Purnomo Yusgiantoro told Reuters on Friday. "But people are fully prepared to make up the production if there is no Iraqi oil."

OPEC sources said the group probably would leave formal output limits unchanged at 24.5 million barrels per day (bpd) and prepare to suspend limits altogether if war erupts.

Also an option is the immediate suspension of quotas at the March 11 gathering in a bid to calm prices in the final days before any war.