Oil prices set fresh two-year high

Oil reserves in the US are running low

Oil prices leapt 3% to fresh two-year highs, after the head of the world's largest oil company said US crude reserves should not be used to temper price rises.

US light crude touched $35.60 a barrel - its highest level since November 2000 - before closing at $35.44 a barrel, $0.96 up on the day.

The fundamentals do not justify US drivers paying the highest gasoline price on record for the month of February

American Automobile Association

London Brent crude ended $0.67 up at $32.37 a barrel.

The gains followed a warning by Lee Raymond, chairman at Exxon Mobil, that oil reserves were meant to be used as a shield against supply disruptions, rather than to manipulate the market.

"The use or threat of use of strategic reserves as a convenient instrument to merely affect short-term energy prices is not the purpose," Mr Raymond said.

Cold snap

Besides the threat of war against Iraq, recent oil price rises have been underpinned by a shortage of heating oil, as temperatures have remained below winter norms.

The north east of the US, the world's largest regional heating oil market, is braced for a cold snap this week.

Gold saw some much needed profit taking

James Moore TheBullionDesk.com

Also, supplies are coming in at a slower pace than usual because Venezuela, a key exporter of heating oil to the US, is struggling with a crippling general strike.

This has led to suggestions Washington might release oil from the so-called Strategic Petroleum Reserve to dampen demand.

But the American Automobile Association on Tuesday said that the rise in oil prices was not supported by market fundamentals.

"The fundamentals do not justify US drivers paying the highest gasoline price on record for the month of February," an AAA spokesman said.

Profit taking

Gold prices, meanwhile, which have also strengthened amid fears of war against Iraq, gave up some ground on Tuesday.

In New York, gold closed down $1.20 at $363.00 an ounce.

The metal has lost almost $28 since hitting a 6.5 year high last week.

"The mood of the market is probably to take profit on rallies," the head of a precious metals trading operation said.

James Moore, an analyst at specialist website TheBullionDesk.com, said: "Gold saw some much needed profit taking."

Traders said aggressive selling from an American bank had also helped push the gold price lower.

Volatile market

But Mr Moore said gold prices could be jumpy in the coming days, as investors look ahead to Friday, when the UN Security Council will hear a key report from top weapons inspectors.

Gold is often seen as a safe-haven in times of international tension.

The slide in gold prices came as a government source in Germany, the current president of the UN Security Council, said 11 of the council's 15 members wanted to extend UN arms inspections in Iraq.

This would mean a delay of a US-led push for war.

In spite of recent falls, gold prices have still risen by about 15% since the beginning of December.