Oil ends above $40 as fighting escalates

Mideast fighting is not expected to hurt oil supplies.

HOUSTON (AP) — Crude prices rose above $40 a barrel Monday as Israel and Palestinian militants exchanged rocket fire and the death toll mounted in the oil-rich region.

Light trading contributed to market volatility in the final days of 2008, with price swings of close to $5 a barrel.

Light, sweet crude for February delivery rose $2.31 cents to settle at $40.02 a barrel on the New York Mercantile Exchange, the first time crude has ended the day above $40 in a week. Nymex will be closed Thursday for the New Year’s Day holiday.

Retail gasoline prices in the U.S. continued to fall and neared $1.60 per gallon nationally Monday.

In the Middle East, Israel destroyed symbols of Hamas power on the third day of what the defense minister described Monday as a “war to the bitter end.” The three-day death toll rose to at least 364 Monday, with some 1,400 reported wounded. Israel launched its campaign, the deadliest against Palestinians in decades, on Saturday in retaliation for rocket fire aimed at civilians in southern Israeli towns.

Israel obliterated symbols of Hamas power, with missiles striking next to the Hamas premier’s home, and devastating a security compound and a university building.

Phil Flynn, an analyst at Alaron Trading Corp. in Chicago, called oil’s initial run-up “an emotional reaction to what was going on in Israel,” and said similar, short-lived spikes have occurred during other clashes in the region.

“In reality, the likelihood the conflict is going to interrupt oil supply in any way, shape or form is highly unlikely,” Flynn said. “Obviously, if the conflict widens, and other countries get involved directly, you might have a different situation.”

There were also hints from China the government could go on a crude-buying spree to take advantage of prices below $40 a barrel. A senior government official writing in the People’s Daily said China wants to increase its oil reserves to cushion supply shocks that it believes are inevitable.

China is encouraging companies to use all spare petroleum storage capacity to take advantage of the current low prices, the official said.

Asia’s biggest refiner, the state-owned China Petroleum & Chemical Corp., recently completed construction of its largest storage project, a 38-tank facility with a total capacity of 32.4 million barrels.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced crude production cuts totaling more than 4 million barrels per day as it tries to stop the decline in prices. OPEC members, however, have a history of ignoring announced quotas and crude traders are looking for evidence the 13-nation group is tightening the spigot.

Tumbling crude prices have led to enormous declines in the price of retail gasoline.

At the pump, retail gas prices fell eight-tenths of a penny overnight to a new national average of $1.619 a gallon Monday, well below the year-ago average of $3.039 a gallon, according to AAA and the Oil Price Information Service.

A Shell station in suburban Houston was selling regular unleaded for $1.19 a gallon Monday.