Kuwait is set to halt some of its oil production in the event of war

Oil prices have risen on news that US oil stocks had fallen back to hit 28-year lows as it prepares for a war with Iraq.

Oil prices had initially fallen on Wednesday after the oil cartel Opec said it would step in to replace any disruption to Iraqi oil supplies in the event of military action.

But benchmark Brent oil in London rallied 41 cents at $33.70 a barrel.

Over in New York, US crude rallied $1.11 to $37.83 a barrel, the highest level since October 1990, two months after Iraq invaded Kuwait.

Weekly data from the US Department of Energy indicated US crude oil supplies dropped 1.4% to 269.8 million barrels.

Unexpected drop

The numbers were in line with estimates from the American Petroleum Institute (API), which said oil supplies had fallen 1.74 million barrels.

The drop in US oil supplies was unexpected, with analysts forecasting a rise of 300,000 barrels.

GNI-Man Financial analyst Lawrence Eagles said: "With US temperatures warming up next week and spring clearly on the way, the (API's) distillate stock figure is not as great a concern as it was a few weeks ago.

"However traders will now be concerned about the ability of the US to source enough oil to prevent a severe gasoline squeeze this summer," he said.

Opec

Also on Wednesday, the energy watchdog, the International Energy Agency (IEA), said it was concerned about Opec's spare oil capacity, saying it might not be enough to make up for a shutdown of Iraqi supplies of about 1.7 million barrels a day.

During a meeting in Vienna on Tuesday, Opec members had decided to keep its production limits unchanged.

The market is heading into a period of heightened uncertainty with low stocks and limited spare production and shipping capacity International Energy Agency

But one of Opec's most prominent members, Saudi Arabia, said it was willing to tap into all of its spare capacity, if necessary.

"There will be no shortage of oil," said Saudi oil minister Ali al-Naimi.

"The test is, when the need is there, whether we will use the capacity or not and I can assure you we will."

At the moment, Saudi Arabia is the only member in the oil cartel not pumping oil to its full capacity.

But oil analysts have raised doubts over the cartel's ability to deal with disruption of oil supplies, should a war with Iraq break out.

In addition to Iraq's 1.7 million barrels of oil a day, neighbouring Kuwait has warned it might be forced to cut daily production by about 700,000 barrels as a safety measure in case of war.

The Paris-based IEA said in its monthly Oil Market Report on Wednesday that Opec's oil production capacity has narrowed to just 900,000 barrels a day, coming off the back of production increases over the past two months.

"This is less than the potential loss of supply in the event of war in Iraq," the IEA said.