Crude oil prices rise on Middle East fighting

HOUSTON - Crude prices rose above $40 a barrel yesterday as Israel and Palestinian militants exchanged rocket fire and the death toll mounted in the region.

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

At the end, light, sweet crude for February delivery rose $2.31 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.

Retail gasoline prices in the U.S. continued to fall and neared $1.60 per gallon nationally. In Philadelphia and the four suburban counties in Pennsylvania, yesterday's average at the pump was $1.71 a gallon, unchanged from Sunday. In the three suburban counties in South Jersey, the average fell two cents to $1.46.

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. That would drive up prices by crimping supplies.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced crude production cuts totaling more than four 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.

Oil prices have fallen 73 percent since peaking at $145 a barrel on July 3 as a credit crisis in the U.S. sparked a steep drop-off in consumer demand and corporate earnings. Analysts expect more dismal economic news from the fourth quarter over the next few weeks.