Oil prices ended at fresh record highs on Thursday as U.S.-led forces sought to crush a rebellion in the holy Iraqi city of Najaf, a move which Shi'ite Iraqi militia have warned could trigger fresh attacks on oil infrastructure.

U.S. light crude traded up to $45.75 a barrel, the highest price in 21 years of trade on the New York Mercantile Exchange (search), before settling 70 cents higher at $45.50. London's Brent crude futures peaked at $42.56 and settled 72 cents higher at $42.29.

Fund buying fueled much of the day's gains, traders said.

"(A higher) oil market is the single clearest trend we see in the world today," said Peter Thiel, president of Clarium Capital Management LLC, which manages funds of over $250 million, including NYMEX oil futures.

Iraq's oil exports have run at half normal levels for the last four days as an uprising by an anti-U.S. cleric threatens infrastructure in southern production centers.

U.S. Marines launched a major offensive in Najaf on Thursday to root out militiamen loyal to Shi'ite Muslim cleric Moqtada al-Sadr. Sadr's militia has threatened to blow up oil pipelines if U.S. forces storm Najaf.

A late Monday pipeline sabotage attack has already cut loadings from Iraq's two offshore Gulf terminals -- which account for all the country's exports -- to 960,000 barrels per day compared with 1.9 million normally. Iraqi officials said they had reopened the pipelines and would resume full exports later on Thursday.

Fears that tightly stretched supplies have left little leeway for any disruptions have added 19 percent, or $7, to a barrel of crude oil since the end of June.

"(Price rises due to) one-off shocks are important because there is no spare capacity -- they are symptoms of the problem, which is the global shortage," Thiel said.

A hefty and unexpected drop in U.S. crude inventories on Wednesday has added to concerns that supply may not be able to keep pace with demand, which is growing at the fastest rate in 24 years.

U.S. crude inventories fell by 4.3 million barrels to 294.3 million last week, the U.S. government said in a weekly report.

Adding to supply concerns, about 25 percent of U.S. Gulf of Mexico oil production of 1.7 million bpd was shut on Wednesday by Tropical Storm Bonnie. Workers were returning to their platforms on Thursday.

Traders also remain worried that the Aug. 15 referendum on the rule of Venezuelan President Hugo Chavez (search) could upset supplies from the world's fifth-biggest exporter.

And Russia's biggest oil exporter, Yukos (search), continues to battle bankruptcy, trying to avoid any disruption to its 1.7 million bpd of production.

"Everything's gone wrong in the oil market recently. If you wanted to paint the worst scenario picture, you couldn't do much better," said David Thurtell, commodities strategist at Commonwealth Bank of Australia.

Traders are concerned that a surge in production by the Organization of the Petroleum Exporting Countries (search) has left little spare capacity to cope with supply problems, despite assurances by Saudi Arabia it could increase supply.

Saudi Oil Minister Ali al-Naimi said on Wednesday that Riyadh was pumping 9.3 million bpd of crude and was ready to tap surplus capacity of 1.3 million bpd if required.

"Naimi's comment is an effort to deflect pressure from oil-importing states demanding that Saudi Arabia increase supplies; what spare Saudi production there is cannot be brought on-line easily or quickly," said U.S.-based Strategic Forecasting Inc.

The International Energy Agency adviser on energy to 26 industrialized nations reckons OPEC's sustainable spare production capacity shrank to 600,000 bpd in July as the cartel raised output to try to contain prices.