Oil price at highest in five months

Oil prices rose to their highest in more than five months yesterday, as tension in the Middle East is fanned by the Western response to the alleged use of chemical weapons by the Assad regime in Syria.

Oil prices rose to their highest in more than five months yesterday, as tension in the Middle East is fanned by the western response to the alleged use of chemical weapons by the government of Bashar Al Assad in Syria.

Brent futures rose to US$111.34 a barrel in early trading yesterday, to levels last seen early in March.

The United States and the United Kingdom have vowed to react strongly if claims over chemical attacks in Damascus prove to be true, and military intervention is possible.

United Nations inspectors yesterday began work at the sites where the attacks are said to have taken place last week.

"We have tried those other methods - the diplomatic methods - and we will continue to try those. But they have failed so far," the United Kingdom's foreign secretary William Hague said yesterday.

At the same time, the violent clashes between the military and the Muslim Brotherhood in Egypt have raised the spectre of interrupted oil trade routes via the Suez Canal and a pipeline running through the country.

"While fundamentals are robust, the deteriorating geopolitical backdrop in Egypt and Syria has once again instilled a fear factor in the market, pushing up prices further," said Amrita Sen, the chief oil analyst at Energy Aspects.

A deteriorating security situation and striking workers in Libya has led to production shut-ins and declining exports, with output in Iraq and Nigeria also dipping. On the demand side, recovering economies in OECD countries are buoying prices.

"Unless Libyan supplies return quickly, the risk of a price spike remains as stock draws are gaining pace," said Ms Sen, who expects Brent to remain above $110 a barrel in the near term.

The upheaval in Egypt and Syria has not dented output by the major Arabian Gulf oil producers, limiting its impact to a risk premium in a jittery market. Brent is still some way off this year's high of $118.9 a barrel.

"Even with a lot of tension in the region it's still a domestic problem instead of a regional problem, so it's not affecting the output of major producers," said Hans van Cleef, an energy analyst at Abn Amro. "As long as major oil producers are not involved further I don't see a new year-high in the near term."

Oil was supported by weak new home sales in the US in July. An important economic indicator, the decline in house sales is fuelling expectations that the Federal Reserve will not taper its stimulus programme for now.