Oil hits new high on terror fears

WORLD oil prices struck new highs today amid worries that sabotage against Saudi Arabia's oil infrastructure could destabilise the world's biggest crude exporter.

US crude futures rose as far as $42.45 a barrel, the highest since the contracts were launched in New York in 1983. In London, Brent crude slipped 53 cents to $38.55 after yesterday leaping by $1.50.

Suspected al Qaeda attacks in Saudi Arabia at the weekend have heightened concerns about the kingdom's ability to contain a wave of violence by Islamic militants.

Violence erupted again today when Saudi police killed two Muslim militants in Taif, near Mecca, and gunmen in Riyadh opened fire on a convoy of American vehicles, injuring one driver.

Analysts estimate a risk premium of between $5 and $9 has been factored into the price due to the possibility of an attack on a major oil installation.

Today Opec's big producers made a renewed bid to force oil prices lower by opening the taps wide, even before an expected formal cartel deal tomorrow to raise output limits. In London Treasury aides said Chancellor Gordon Brown was 'hitting the phones', stepping up pressure on the Opec nations ahead of tomorrow's meeting in Beirut.

The United Arab Emirates said it was immediately releasing an additional 400,000 barrels daily this month, complementing 700,000 already on the way from Saudi Arabia.

The extra crude is being pumped irrespective of any formal decision by the Organisation of the Petroleum Exporting Countries on higher output quotas at a Thursday meeting in Beirut. Others in OPEC are already pumping at full stretch.

Saudi Arabia said Opec could not guarantee to control prices when speculators were feeding a boom on perceptions of instability in the producer countries.

'The main reason is because there is a perception of a future shortage as a result of instability in producing countries. There is no shortage now, but they are speculating,' said Saudi Oil Minister Ali al-Naimi.

'The paranoia about terrorism in the world threatening all the oil establishments in the world - that's not true,' Naimi said. 'I tell you I am confident that facilities in Saudi Arabia are very, very secure and they are protected very strongly to prevent anything happening to them.'

Saudi appears to have backing from most in Opec to lift official supply quotas by 2.5m barrels daily or 11%. Algeria has proposed taking Opec's ultimate step and suspending quota limitations altogether.

That would grant Saudi official licence to pump at will and perhaps have a psychological impact on prices.

'It is the only way to make an impact on the market,' said Algerian Oil Minister Chakib Khelil.

The latest rally raises doubts about whether an increase in supplies when Opec ministers meet tomorrow will be enough to tame prices.

Stock markets took the rocketing oil price in their stride, although analysts said it would continue to weigh on sentiment. The FTSE 100 index of leading shares rose 34 points to 4456.7 and similar gains were seen on Continental bourses.

'It's about oil, oil, oil,' said David Buik at City bookies Cantor Index. 'People out there are trying to be stoical about this oil price but others are shifting in their seats rather nervously. If Saudi Arabia gets out of hand we've got serious trouble.'

Fears steep fuel costs could hit the US economy drove the dollar lower across the board. Against sterling, it dropped nearly a cent to $1.8460.