OIL PRICES SENDING RED ALARM

Oil prices rose as Turkish geopolitical tensions in Iraq sparked fears supply might be hit in the world's third biggest producer.

Iraq's regional Kurdish government called today for direct talks with Ankara after the Turkish parliament yesterday authorised a military incursion into its Northern territory to crack down on rebel fighters. Yesterday's announcement sent prices to unprecedented highs.

New York prices struck 89 usd a barrel yesterday afternoon and London's Brent rallied to 84.43 usd, its highest ever level.

Oil players worry Iraq's 115 bln barrels of crude oil reserves could be hit amid volatile political tensions. However, any Turkish army operations against Kurdish rebels in northern Iraq are likely to be low-level raids yielding more psychological benefits than military ones, Turkish analysts said.

Markets tossed aside weekly US petroleum data, released yesterday, which showed crude oil, gasoline and distillate (which includes heating oil) stocks rose above expectations.

'If you took politics out, the data yesterday could have seen it (oil prices) drop aggressively,' said Nas Nijjar, CMC Markets trader. He added with higher volumes traded, the weekend fast approaching and the New York front month contract due to expire on Monday, trade is expected to remain volatile.

At 1.17 pm, London's benchmark Brent crude contracts for December delivery were up 26 cents at 83.39 usd per barrel.

Meanwhile, New York crude contracts for November delivery were up 48 cents at 87.88 usd per barrel.

Also lifting prices are expectations heating oil stocks will tighten in the final quarter as winter demand rises across the Northern Hemisphere.

Yesterday's US inventory report should be viewed with lower refinery rates in mind, said MF Global analyst Edward Meir. Lower refinery runs means less product supply on the market, which hints at lower future supply going into the peak winter heating oil demand season.

'The bearish numbers were partly offset by yet another drop in refinery utilization rates, reminding participants that refineries are still thinly stretched going into the winter,' explained Meir.

US distillate fuel production is up 1.8 pct year-on-year, but stocks in days in cover are down 1.5 pct. Domestic crude oil production is down 1.9 pct while demand is down 1.3 pct.

'As we look ahead, crude oil demand is set to increase. This seasonal reality, coupled with the term structure suggests further draws in crude stocks through the quarter,' said Stephen Schork at The Schork Report.

With oil prices at such elevated levels OPEC ministers have surfaced, with Nigerian official Odein Ajumogobia commenting the cartel could hold a production changing meeting at next month's conference in Saudi Arabia.

'Remarks by the Nigerian OPEC delegate that the cartel may act in the face of continued upward price pressure have also injected a modicum of caution in respect of the current bull run,' said Bank or Ireland analyst Paul Harris (nyse: HRS - news - people ).

OPEC's formal production meeting was scheduled for December in Abu Dhabi. The group agreed to raise production by 500,000 bpd starting November 1 at its last meeting.