Oil Surpasses $107 on Iraq Pipeline Explosion

Oil rose above $107 a barrel on Thursday after saboteurs blew up a major pipeline in Iraq, sharply reducing exports from the south of the country.

The gain was limited by a firmer U.S. dollar, which rallied after a U.S. government report showed the economy grew in line with market expectations in the fourth quarter and due to a fall in U.S. jobless claims.

"Today's action was driven up by the explosion and catching fire of a pipeline in Iraq, but then the market sold off on the jobless numbers," said Nauman Barakat of Macquarie Futures USA. "This in turn strengthened the dollar."

U.S. light, sweet crude was higher, having earlier risen as high as $107.70. London Brent crude followed the move.

The attack on the pipeline in southern Iraq came on the third day of an Iraqi military operation against fighters loyal to Shi'ite cleric Moqtada al-Sadr in the oil port of Basra.

The resulting blaze was quickly extinguished and officials said efforts were under way to get shipments back to normal. It is the first time since 2004 that the southern supply route has been disrupted.

"This morning saboteurs blew up the pipeline transporting crude from Zubair 1 by placing bombs beneath it. The pipeline was severely damaged," a Southern Oil Company official told Reuters.

"Crude exports will be greatly affected because this is one of two main pipelines transporting crude to the southern terminals. We will lose about a third of crude exported through Basra," he said.

Iraq exported about 1.54 million barrels per day from Basra in February. Overall Iraqi oil exports have only recently returned to a rate similar to that before the U.S.-led invasion.

Officials in Basra had different views about how long it would take to restore supplies and the seriousness of the incident. Officials in Baghdad, by contrast, were optimistic the damage could be contained.

Oil's move up followed a gain of almost $5 on Wednesday prompted by a drop in fuel inventories in top consumer the United States and as a weak dollar prompted investors to move money back into commodities.

Gasoline stocks fell by a larger-than-expected 3.3 million barrels and distillates dropped 2.2 million barrels, also more than forecast, the Energy Information Administration said.

Analysts say the weak dollar has prompted investors to buy oil and other commodities as a hedge against inflation, while dollar strength can have the opposite effect.

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