Oil: Price jumps US$2 on speculation, gas row

NEW YORK - Oil shot up more than US$2 on Tuesday after touching two-and-a-half month highs as big money funds flooded commodity markets and consumers feared a row over Russia's natural gas price to Ukraine could crimp European supplies.

US crude closed up US$2.06 to US$63.10 a barrel after reaching US$63.80, the highest level since mid-October and the biggest daily jump since mid-September.

The gains extended a three-day rally that lifted prices 5 per cent at the end of 2005, when oil averaged US$56.70 a barrel-- 37 per cent more than the previous year. London Brent crude traded up US$2.47 to US$61.45 a barrel on Tuesday.

"It's the new year and money is spilling over," said Steve Bellino of Fimat USA. "Commodities are in strong demand worldwide, whether it's copper, oil, gold. There are a lot of dollars chasing a limited amount of commodities."

Money managers were a driving force behind rallying energy prices in 2005 as they favored commodities over the less attractive equities market, and appear set to continue bolstering oil prices this year.

Adding support, Russian state-controlled producer Gazprom cut natural gas supplies to Ukraine briefly after the former Soviet republic rejected demands to pay four times more for its gas -- a break with subsidised prices rooted in Soviet times.

An immediate crisis was headed off just before markets opened after the New Year holiday when Moscow agreed to restore gas supplies through a pipeline that transits Ukraine.

But the underlying commercial dispute was still brewing, raising concerns over Europe's long-term dependence on Russian energy amid a lack of readily available alternatives.

"Whilst the immediate impact on European energy prices has been negligible, the dispute has served to emphasise the dependence of Western Europe on Russian gas supplies and the issue has the potential to keep European gas consumers on edge for some time," said Kevin Norrish of Barclays Capital.

Russia, owner of the world's biggest gas reserves, turned up the heat on Tuesday by accusing Kiev of stealing gas from the pipeline.

"Ukraine continues to steal gas...Gazprom will once again compensate its European consumers but it cannot continue eternally," said Sergei Kupriyanov of state-run Gazprom.

Kiev has denied taking Russian gas, but said it would do so if temperatures fell below freezing.

Gazprom cut gas exports to Ukraine on January 1 after the former Soviet neighbour rejected demands to pay four times more for its gas.

Several countries in Europe -- which relies on Russia for a quarter of its gas -- reported sharp falls in deliveries before Moscow began restoring supplies on Monday, bowing to Western pressure to avert an energy crisis.

In the UK -- Europe's only major, freely traded gas market -- wholesale prices rose as much as 8 per cent on Tuesday as dealers worried about a possible disruption of Russian supplies while consumers braced for colder temperatures.

"UK gas prices would have rocketed if this (disruption) had happened when the markets were open," said a UK-based trader.

In Iraq, crude exports from the country's main Basra oil terminal in the south resumed on Monday as the weather improved and logistical problems were solved.

But total December exports were still at a post-war low of 1.1 million barrels a day, officials said, about half the level seen during sanctions under Saddam Hussein.

- REUTERS