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Oil Rises to Record Above $92 on Increased U.S.-Iran Tension

Oct. 26 (Bloomberg) -- Oil rose above $92 a barrel for the first time in New York after the U.S. accused Iran's military of supporting terrorism and announced new sanctions on the country that holds the world's second-biggest oil reserves.

``There's nothing out there to stop oil from going to $100,'' said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $4.5 billion oil and gas company bond portfolio. ``There are plenty of bullish factors such as the continued dispute between Turkey and Iraq, the new sanctions against Iran and falling inventories.''

The U.S. wants Iran to halt uranium enrichment that it suspects is a cover for developing nuclear weapons. Prices also rallied on Turkish warnings of a wider military assault on northern Iraq. U.S. crude-oil supplies fell last week to the lowest since January, a government report showed on Oct. 24.

Crude oil for December delivery rose 76 cents, or 0.8 percent, to $91.22 a barrel at 2:07 p.m. on the New York Mercantile Exchange. Futures climbed to $92.22, the highest since trading began in 1983. Oil is up 51 percent from a year ago.

Brent crude oil for December settlement rose 75 cents, or 0.9 percent, to $88.23 a barrel on the London-based ICE Futures Europe exchange. Brent reached $89.30, the highest since trading began in 1988.

``I think we are going to $100, if for no other reason than because there are some traders who want to say they took oil there,'' said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. ``When you get close to a psychological number, reaching it becomes a self-fulfilling prophecy.''

U.S. Inventories

U.S. crude-oil supplies fell 5.29 million barrels to 316.6 million barrels last week, the Energy Department said this week. The drop left stockpiles the lowest since the week ended Jan. 5.

``This rally was triggered by the big decline in crude oil we saw on Wednesday'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``The crude-oil number has made us sensitive to any geopolitical news at all, regardless of the significance.''

Industry stockpiles of crude oil and petroleum products in the world's most developed economies declined by 33.3 million barrels during the third quarter, counter to the trend of the past five years, the International Energy Agency said on Oct. 11.

``We did not build global inventories during the second and third quarters because demand outpaced supply,'' Emerson said. ``That reality is sinking in and is partially responsible for the rise from $70 to $80 and then $90 a barrel.''

New Sanctions

The Bush administration yesterday announced new sanctions against Iran that designate the Iranian Revolutionary Guard Corps as a proliferator of weapons of mass destruction and its Quds force as a supporter of terrorism.

The strategy is aimed at showing governments and overseas banks they would be tainted by doing business with Iranians linked to terrorism or arms proliferation, making it more difficult for the regime to gain access to international capital.

Turkey is threatening to send troops into northern Iraq unless Iraq and the U.S. take measures to stop about 3,500 Kurdish militants from attacking targets in Turkey, including closing the group's camps and cutting off supply routes. The U.S. has urged restraint from the Turkish government.

The Turkish air force hit targets in northern Iraq today, Reuters reported, citing Turkey's deputy prime minister.

Combination of Factors

``I don't think I've ever seen such an explosive market without a major correction,'' said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. ``There is a combination of factors that continue to send prices higher and we've run out of bearish news.''

Oil also rose because the U.S. dollar declined to a record low against the euro on speculation that the Federal Reserve may cut interest rates next week. Lower rates will reduce demand for U.S. assets as investors look for better returns in countries with higher yields. Commodities are one of the investments that become more appealing.

Members of the Organization of Petroleum Exporting Countries have said a falling dollar justifies higher prices because oil- producing countries sell oil in dollars and often buy goods in euros. The group agreed in September to produce an extra 500,000 barrels a day starting Nov. 1 to lower prices and meet fourth- quarter demand.

``The OPEC countries have gotten used to these prices,'' said Claudia Kemfert, head of the energy department at the Berlin-based DIW economic institute. ``I think that in the future they will seek to keep the prices high.''

To contact the reporter on this story: Mark Shenk in New York at .

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