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Oil Touches Record $78 on Mideast Conflict

Oil surged to record highs above $78 Friday on fears the conflict between Israel and Hezbollah guerrillas could escalate and spread to more Middle East countries.

Iran's nuclear standoff with the West, fears over oil supply in Nigeria due to militant attacks, an influx of fund buying and falling U.S. crude supplies also buoyed the price of oil, which is up nearly 30 percent this year.

U.S. crude soared to as high as $78.40 a barrel in intraday trading before settling up 33 cents at $77.03. Crude oil on the New York Mercantile Exchange rose $2.94, or 4 percent, this week. London Brent rose 58 cents to $77.27 a barrel, after jumping to a record of $78.03 a barrel earlier in the session.

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"The speculators are out there panicking about Israel because they think it's going to spread through the Middle East," said Mike Barry, director at London's Energy Market Consultants.

Israel struck Hezbollah targets and devastated a wide array of Lebanese civilian installations on Friday. Israel has drawn world criticism of its tactics since the Shiite fighters seized two soldiers and killed eight.

Hezbollah, which wants to trade its captives for prisoners held in Israel, fired more rockets across the frontier. The group's chief, Sayyed Hassan Nasrallah, pledged open war on Israel after it bombed his Beirut home Friday

Iranian President Mahmoud Ahmadinejad on Thursday warned that any Israeli strike on Syria would be considered an attack on the whole Islamic world that would provoke "a fierce response." Both Iran and Syria support Hezbollah.

Neither Israel nor Lebanon are oil producers. But both lie at the heart of the Middle East, which collectively pumps nearly a third of global output. The situation has made oil traders nervous.

"Rarely has this market been as jittery," said Anthony Sabino, professor at St. John's University in New York.

OPEC sought to calm the market, saying there were sufficient supplies to meet global demand.

"The market remains well-supplied with crude," the cartel said in a statement. "Geopolitical developments, over which OPEC has no influence, have been behind this sudden rise in volatility."

EYES ON $80 OIL

Illustrating the market's sustained strength, prices for oil futures contracts to be delivered further ahead were trading above $80, from December 2006 to August 2007.

"There is nothing to stop prices at the moment with the stream of headlines that are coming in. All we need now is a big hurricane," Barry said.

In Iran, Ahmadinejad said Thursday the world's fourth-largest oil exporter would not abandon its right to nuclear technology. Tehran's case was referred back to the Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons.

"With Israel and Nigeria, Iran completes the triumvirate of key tensions supporting prices," said Mark Pervan, a resources analyst at Daiwa Securities.

Analysts have expressed concerns about the effects of high energy prices on global economic growth. But U.S. Energy Secretary Sam Bodman said Friday the economy of the world's top energy consumer has held up against rising fuel costs.

"We have found that the U.S. economy has been surprisingly resilient, surprisingly able to manage the increase in prices that we have already seen," Bodman said at a news conference with Canadian government energy officials.

"I am hopeful that it will continue to do so."

Oil prices averaged $67.67 so far this year, but were still substantially below the inflation adjusted $87.65 average of 1980, hit during the second oil shock that followed the 1979 Iranian revolution.

Some experts noted that much of the money chasing oil was speculative, and said prices could easily fall if tensions ease.

"There's a lot of new financial investment coming into the market," said Michael Wittner of Calyon investment bank. "Some of that will be hot money, so profit-taking could take us below $75 in a heartbeat."

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