Oil prices hit a new high yesterday in the wake of rising political tension in the Middle East.
News of continued conflict between Israel and Hizbullah guerillas drove the price of US crude oil to $78.40 a barrel in intraday trading yesterday, while benchmark Brent crude reached a high of $78.04 a barrel on London markets.
Leading share indices fell in reaction to the news, while gold prices and the value of the dollar - traditional investor havens in times of crisis - rose on the news.
"Soaring oil prices and rising Japanese interest rates have combined to hit the market hard overnight," Niall Dunne, financial market strategist with Ulster Bank said yesterday.
Ulster Bank has predicted that the latest rise will affect retail sales and domestic inflation, while Bank of Ireland predicted that oil prices could rise further in response to escalating conflict in the region, which produces one-third of the world's oil supplies.
"You're looking at €1.20 for a litre of petrol so that consumer sentiment, which is already weakened, will be further affected. This will affect July and August retail sales," Ulster Bank chief economist Pat McArdle said yesterday.
"Friday brings with it a sense that further actions over the weekend will see prices higher again," Paul Harris, head of energy and emissions at Bank of Ireland Global Markets said.
International analysts said oil prices could test new highs of $80 a barrel in coming days. Israel continued its attacks on Hizbullah targets in Lebanon yesterday as the guerilla organisation fired more missiles over the border at Israel, prompting fears amongst oil traders that the conflict would spill over into Syria.
"The speculators are out there panicking because because they think it's going to spread through the Middle East," Mike Barry, director at London's Energy Market consultants said yesterday.
On Thursday Iranian president Ahmadinejad warned that an Israeli strike on Syria would provoke a "fierce response" from the Islamic world. He added that Iran would not give up its attempts to develop nuclear technology, which has been a source of tension between the world's fourth oil exporter and the US.
(Additional reporting, Reuters)
