Oil jumps 3.9% on supply worries

Conflict in Middle East and Russia-Ukraine energy dispute spark concern about supply disruptions; falling demand still a concern.

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By Kenneth Musante, CNNMoney.com staff writer

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At what level will the Dow Jones industrial average, which ended 2008 at 8,776, finish 2009?
  • Above 10,000
  • Above 8,776 but below 10,000
  • At or below 8,776

NEW YORK (CNNMoney.com) -- Oil prices rose nearly 4% on the first trading day of 2009, as fighting in the Middle East and Russia's energy dispute with Ukraine raised concerns about future supply disruptions.

U.S. crude for February delivery settled up $1.74, or 3.9%, to settle at $46.34 a barrel. The market was closed Thursday in observance of the New Year holiday.

Over the past week, Israel has been striking targets in the Gaza Strip, saying that it was retaliating for Hamas rocket attacks. Some analysts worry that the Gaza conflict could widen, disrupting production in the Middle East.

The fighting could represent a real threat to supply "if the conflict were to escalate to a ground assault," and if oil-producing neighbors such as Iran got involved, said Rachel Ziemba, energy analyst with research firm RGE Monitor.

And in a dispute with neighboring Ukraine, Russia's state-owned energy company, Gazprom, began halting exports of natural gas to the country after the two failed to agree on a price increase. The supply disruption could affect energy prices in western European markets.

There has also been concern that Russia, a major oil producer, may try to follow in the footsteps of OPEC and cut production or take some other coordinated action in an effort to boost prices.

OPEC, whose members produce about 40% of the world's oil, agreed in December to slash oil production by 2.2 million barrels a day beginning this month. The cuts were aimed at bolstering crude prices, which plummeted more than 60% in 2008.

"Russia and OPEC have now joined together," said Bob van der Valk, independent petroleum industry analyst. "Who can predict what Russia will do next?" he added.

The Russia-Ukraine dispute is definitely something to watch, according to Ziemba.

However, as demand for crude oil has fallen through 2008, threats to supply have been having less of an effect on prices.

"We're in an environment now where countries are sitting on a lot of inventory," said Ziemba. As demand falls, stockpiles build, she explained

For example, the Russia-Ukraine dispute was "having less effect on even the natural gas markets than some people feared," she said.

Natural gas prices rose 35 cents to $5.971 per 1,000 cubic feet Friday.

In the U.S., which is the world's largest oil consumer, stockpiles of crude oil rose by 500,000 barrels last week. Supplies in the U.S. have been building as the economy slows, and consumers and businesses use less petroleum-based fuel.

Oil prices tumbled 61% last year. And on Friday, that decline was partly behind the government's move to resume filling the Strategic Petroleum Reserve, a series of government-controlled oil reservoirs designed for use in emergencies.

The new crude supply will replenish SPR supplies sold following hurricanes Katrina and Rita in 2005.

There had been a moratorium on purchasing oil for the SPR from May through December 2008.

The government also said that "acquisitions in 2009 will fill the SPR to its current storage capacity of 727 million barrels and provide the U.S. with approximately 70 days of net import protection."

"Because of the President's decision to fill the SPR to unprecedented levels, we are now better prepared than ever before to deal with [supply] disruptions from hurricanes or other potential threats," said Energy Department spokeswoman Healy Baumgardner. To top of page

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