Oil zooms as Iraq says Kuwait a target

World oil prices bounced back after Iraq said it could retaliate against crude producing neighbour Kuwait if the United States launches an attack from Kuwaiti territory.

US light crude by 1730 GMT was up 26 cents at $32.52 a barrel after losing 99 cents on Monday. London Brent blend added 34 cents to $30.20 a barrel.

Iraqi Deputy Prime Minister Tareq Aziz told Canada's CBC television in an interview in Baghdad that Iraq might strike at Kuwait to defend itself against a US invasion.

"Kuwait is a battlefield and American troops are in Kuwait and preparing themselves to attack Iraq," he said.

"If there will be an attack from Kuwait I cannot say that we will not retaliate. We will of course retaliate against the American troops wherever they start their aggression on Iraq. This is legitimate."

Dealers are waiting for US President George W Bush's State of the Union address later on Tuesday, at 2100 local time (0200 GMT), for further clues on the timing of any war effort.

"Some traders are looking at whether the threat of war has really subsided, and are taking positions in case the State of the Union address is really more aggressive than the previous rhetoric from Bush," said John Hirjee, senior energy analyst at Deutsche Bank in Melbourne.

Drumbeat

Many military analysts expect hostilities to start by the end of February or early March, once the combined forces of the United States, Britain and Australia are in place in the Gulf.

"We'll hear a deafening drumbeat from the United States in the run-up to February 14," said Iraq expert Toby Dodge of Warwick University.

"I would be surprised if the air war had not started within seven days of that."

Britain joined the United States in declaring Iraq in "material breach" of UN disarmament demands on Tuesday, a day after chief UN arms inspector Hans Blix told the Security Council that Saddam had not come clean about stocks of lethal weapons.

British Foreign Secretary Jack Straw said a further report by UN inspectors on February 14 was not an ultimatum, but warned Iraq that its ‘unbelievable' refusal to comply with UN demands had diminished chances of a peaceful outcome.

"The US-British deployment will be in place towards the end of February. They could start the air campaign a bit ahead of that, but probably won't," said Sir Timothy Garden, a defence expert at London's Royal Institute of International Affairs.

Capping price gains was further evidence that Venezuela is managing to bring more strike-hit oil production back onstream.

Opposition oil workers in a daily report said output tapped a million barrels a day on Tuesday, a third of normal levels, for the first time during the eight-week shutdown.

The government has used troops and replacement crews to break the strike, which aims to force President Hugo Chavez to resign and call an election.