Oil: Price rises two per cent as Iraqi fears return

NEW YORK - Oil rose nearly 2 per cent on Friday (NY time) as violence continued unabated in Iraq, dashing some hopes that the death of a top al Qaeda leader would turn the tide for the country's struggling oil sector.

US crude oil settled up US$1.28, or 1.8 per cent, to US$71.63 a barrel, trimming this week's losses to 70 cents. London Brent jumped US$1.53 to US$70.48 a barrel.

Prices fell sharply on Thursday after a US air strike killed al Qaeda's leader in Iraq, Abu Musab al-Zarqawi, raising some hope for an improvement in security in the Opec nation.

"Yesterday's move was totally overdone," said Craig Pennington, an analyst at investment bank Schroders. "We can't assume the destruction going on in Iraq is done by just one person." Iraq's oil minister Hussain al-Shahristani told Reuters on Thursday that this would reduce violence and help improve Iraq's oil production, particularly in the north.

Analysts warned, however, against reading too much into the killing of Zarqawi, who masterminded the deaths of hundreds in bombings, saying it would not end threats to an oil sector curtailed by decades of war and sanctions.

On the same day as Zarqawi's death, gunmen kidnapped a senior official of Iraq's oil ministry after he left work in Baghdad. A string of bombs in Baghdad also killed at least 31 people and wounded scores.

Iraq is struggling to pump 2 million barrels per day (bpd), down from about 2.5 million bpd before the US-led invasion in 2003.

Reports of a low pressure weather system developing east of the Yucatan Peninsula helped push up prices as the Atlantic hurricane season begins. Damage to the US energy sector from hurricanes Rita and Katarina last year sent crude oil prices to then record highs.

Prices also found support after tensions reignited between the West and Iran as Tehran launched a fresh round of uranium enrichment.

Iran launched a fresh round of uranium enrichment this week just as world powers offered it incentives to halt nuclear fuel work with the potential to produce atomic bombs, a UN watchdog said on Thursday.

US President George W. Bush on Friday said that Iran has "weeks not months" to respond to the offer and added Tehran needs to suspend the enrichment.

Iranian President Mahmoud Ahmadinejad said on Thursday the Islamic state would "talk about mutual concerns and solving misunderstandings in the international arena." But the president's remarks came a day after Oil Minister Kazem Vaziri-Hamaneh said Iran could still use its oil exports for leverage in the dispute over its nuclear programme.

(Additional reporting by Neil Chatterjee in Singapore and Randy Fabi in London)

- REUTERS