Coming at a time of lower world-wide oil stocks and rising demand, the news sent Brent futures prices up to nearly $22 a barrel, over $1 higher on Friday's close, and triggered a surge in oil company shares.
The turmoil came after UN Secretary-General Boutros Boutros-Ghali temporarily delayed the introduction of resolution 986, agreed in May, which would have allowed the first sales of Iraqi crude since the invasion of Kuwait by Iraq in 1990.
Iraq would have been allowed to sell $2bn of oil over six months to pay for essential food and medicine. Although Iraqi forces have now withdrawn after capturing the town of Irbil in one of the Kurdish "safe havens" on Saturday, the prospect of US military intervention has added to worries that oil supplies may be interrupted by a renewal of hostilities in the region.
Dealers said the UN move to delay the oil for food deal would keep between 650,000 and 750,000 barrels off the world's oil markets.
By late afternoon yesterday, the news had sent Brent crude for October delivery up to $21.84 a barrel, compared with $20.78 at Friday's close.
Yesterday's level is the highest since mid-May, when the October crude contract closed at $21.83. November Brent was quoted at $21.15, up from $20.32 on Friday.
Meanwhile, on the London stock market, BP shares rose 12p to 632.5p, while Shell put on 11.5p to 942.5p.
Irene Himona, oil analyst with Societe Generale Strauss Turnbull, commented: "Iraq is the joker in the pack as far as the market is concerned. It's all helpful for oil prices, and with winter coming and low stocks, the price strength will remain."
But Peter Hitchens of Williams de Broe described the rise in both oil and share prices as "a gut reaction" by European investors.
According to International Energy Agency figures, OECD oil stocks at about 2.4bn barrels are around 100 million barrels less than at the start of last year's third quarter.
The shortfall is said to be due to non-Opec production, principally from the North Sea, failing to meet expectations. One observer put stocks at 60 days' consumption, down from 63 days a year ago.Reuse content