Oil Helped by Iraq Spat, Hurt by OPEC

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Oil prices got help on Tuesday from worries that Iraq might halt crude supplies at the end of the week if a proposal by the United States on the renewal of Iraq's U.N.-monitored oil-for-food exchange is passed.

But early gains were canceled out by a suggestion from OPEC that it could raise production in January if rival non-OPEC suppliers do not meet the cartel's demands for joint supply curbs.

London Brent blend by 1505 GMT was up four cents at $18.40 a barrel and U.S. light crude was up six cents at $18.75.

OPEC is seeking a cut of 500,000 barrels per day by rival exporters including Russia, Mexico and Norway in order to trigger a 1.5 million bpd cut of its own.

"If we don't cut production by 1.5 million barrels per day in January, it is clear that prices will collapse quickly and we can add production as well to exert additional pressure," OPEC's Algerian President Chakib Khelil told reporters at a media forum.

Washington on Monday proposed extending 11-year-old U.N. sanctions against Iraq, including oil-for-food, for four months to the end of March with the proviso that the Security Council commit to a revision of sanctions by then.

Russia wants a regular six-month extension with no strings attached and Iraq's U.N. ambassador said that any extension of less than six months would be unacceptable to Baghdad.

Current provisions expire on Friday.

"I think Iraq will reject a four-month extension of the oil-for-food formula," an Iraqi oil source added from Baghdad on Tuesday.

The U.S. plan would mean postponing until the end of March an attempt to revise Gulf War sanctions against Iraq that seek to eradicate smuggled oil sales that bring finances to President Saddam Hussein while easing the import of civilian goods.

Russia opposed the so-called smart sanctions plan the last time sanctions were renewed in June after Iraq suspended oil sales in protest a month before the U.N. vote.

Baghdad pumps just over two million barrels a day, about four percent of internationally traded world oil supplies.

Fears it could halt crude supplies are helping prices that have sunk by 30 percent in just over two months as petroleum demand deteriorates in the global economic downturn.

"The market is just reacting to headlines again. Iraq is pushing it up," said David Nesbitt of Prudential Bache brokers in London.

On Monday, President Bush provided oil prices with some support by hinting at tough consequences if Iraq refused to let U.N. weapons inspectors expelled in 1998 back into the country.

Bush said Iraqi President Saddam Hussein would ``find out'' the consequences if he refused to let arms inspectors return to his country.

Bush's comments were the most explicit linkage of Iraq to the U.S.-led war on terrorism launched after the September 11 attacks on the United States.

U.S. secretary of State Colin Powell declined to specify what Bush meant but said Saddam should take it as a "very sober, chilling message."

Speculation is rife that Iraqi could be the next target for the U.S.-led global "war on terrorism" after Afghanistan.

At the U.N. in New York, Iraq's ambassador Mohammed Aldouri said Baghdad would not allow inspectors to return as long as the U.N. maintained sanctions imposed after Iraq's invasion of neighboring Kuwait in August 1990.

"Our position is very clear on that question. We will not permit weapons inspectors. We have nothing to inspect," Aldouri said.

A disruption in Iraqi exports would be a blessing for Baghdad's fellow OPEC producers, who are struggling to bring rival Russia aboard supply curbs in a bid to rescue prices.