Crude Price Surges to Record $42 After Saudi Attack

Oil prices surged by more than $2 a barrel to record highs Tuesday after an attack in Saudi Arabia by Islamic militants killed 22 people, heightening fears about political instability in the world's biggest oil exporter.

U.S. light crude closed up $2.44, or by more than 6 percent, after setting an all-time high of $42.38 struck toward the close following an attack Saturday by suspected Al Qaeda (search) militants on the offices of Western companies in the Saudi oil city of Khobar.

That was the highest price in 21 years of crude oil trading on the New York Mercantile Exchange (search).

London Brent crude (search) closed up $2.50 at $39.08 a barrel, after trading as high as $39.12, its priciest in 13 years.

"The security premium has been reinforced," said John Kilduff, senior vice president at Fimat USA. He was referring to the amount added to the market price of oil to reflect fears of an attack on a major oil installation, which some analysts calculate at between $5 to $9 a barrel.

Traders fear the latest incident could be the start of a concerted Al Qaeda offensive to disrupt Saudi supplies at a time when oil prices are already high enough to threaten world economic growth.

A statement purporting to come from Al Qaeda claiming responsibility said it had hit "American companies ... that are specialized in oil and steal the wealth of Muslims."

"It's all about the Saudi story, as it looks like the attacks have the Saudi infrastructure in the crosshairs," said Nauman Barakat, senior vice president at U.S. brokers Refco.

Saudi Arabia's leaders rushed to assure the market that they were in full control after the Khobar attack, the second major strike in a month on the Saudi oil industry.

U.S. Secretary of State Colin Powell also weighed in, saying he was confident that Saudi Arabia -- which holds a quarter of global petroleum reserves -- can provide a secure oil supply despite the attack.

"I have confidence in the ability of the Saudi Arabians to continue to provide a secure flow of oil products," Powell said on Tuesday.

Khobar has no production, export or refining facilities but Western oil firms have offices and housing in the city which lies 240 miles northeast of Riyadh.

Kuwait's oil minister said on Tuesday his country was stepping up oil installation security and was coordinating with fellow Gulf producers to protect against attacks.

Ministers from the Organization of Petroleum Exporting Countries (search) will meet on Thursday in Beirut where they are expected to agree a rise in crude supply limits of up to 2.5 million barrels per day (bpd), or 11 percent.

A senior cartel delegate said on Tuesday such a rise in the quota could bring with it about one million bpd of extra real crude, mostly from Saudi Arabia.

OPEC is already pumping more than two million bpd above its formal ceiling of 23.5 million bpd.

The only producer with significant spare capacity, Saudi Arabia has already vowed to lift output this month about 10 percent to nine million bpd, irrespective of cartel quotas.

Kuwait said on Monday it had ramped up production by 150,000 bpd to 2.35 million bpd.

Many traders say the market has not reacted to the promise of more oil because it is waiting for hard evidence of stock builds in consumer nations.