Crude oil prices are hovering close to their highest level in three months amid fears that a threatened US military strike against Iraq could disrupt supplies.

Brent crude oil for October delivery was changing hands at $27.20 per barrel on Tuesday, down slightly from its Monday closing price.

Crude oil prices have now risen steadily for the past month, despite a pledge from the Organisation of Petroleum Exporting Countries to step up production if hostilities over Iraq broke out.

The rally has triggered fears that expensive oil imports could hold back a fully-fledged US economic recovery, now thought to be gathering pace amid signs that Wall Street has emerged from its recent slump.

Inflationary risk

Higher oil prices push up inflation, reducing central banks' scope to cut interest rates in the event of a downturn in economic growth.

Experts believe that oil prices will remain well supported for as long as the threat of war in Iraq remains, possibly breaching the psychologically important $30 per barrel mark.

"The belief that an attack on Iraq is inevitable, combined with the uncertainty over its timing, will keep oil prices higher than the fundamentals would otherwise support," the Centre for Global Energy Studies said in a monthly report.

Two years ago, Opec production cuts and bottlenecks at Western refineries triggered a sustained oil price rally which was blamed for a jump in inflation in the US and Europe.