Oil Hits Record $40 on War Fear : Economy: November crude later closes at $39.54. Worries about Mideast confrontation cancel the calming effect of Bush’s plan to tap Strategic Petroleum Reserve.

U.S. oil prices broke the $40-a-barrel barrier for the first time Thursday as fears of a Middle East conflict overshadowed President Bush’s stated intention to tap the Strategic Petroleum Reserve.

The relentless upward movement of oil prices showed that war jitters and possible shortages of oil are negating the calming effect of Bush’s announcement late Wednesday that he would release 5 million barrels of crude oil from the 590-million-barrel Strategic Petroleum Reserve.

Prices opened $1 a barrel lower Thursday on the strength of Bush’s announcement, but they soon crept back up--with “rumors and news affecting the market” and fueling a new upward trend, said Tom Bentz, director of trading at United Energy Inc. in New York.

Shortly before noon, light crude oil for November delivery peaked briefly at $40.10 a barrel before falling back and closing at $39.54 a barrel, up 87 cents from Wednesday’s record close, in trading on the New York Mercantile Exchange.

Prices first surged Thursday morning on a rumor, subsequently denied, that U.S. troops had entered either Kuwait or Iraq.

They peaked on a report, later confirmed by the Defense Department, that a U.S. warship had fired warning shots across the bow of an Iraqi tanker in the Gulf of Aqaba. The tanker was boarded by U.S. seamen but was found to be empty and allowed to proceed.

“There is growing tension that the air embargo could drive (Iraqi President) Saddam Hussein to a new level of desperation,” said Peter Beutel, an oil analyst with Pegasus Econometric Group Inc. in Hoboken, N.J.

An Iraqi newspaper Thursday described the United Nations’ embargo of airborne shipments of goods to Iraq as a step toward war. The newspaper, Al Thawra, also reiterated Hussein’s earlier threats to attack Israel and Saudi Arabian oil fields in a war.

In sending oil prices to new highs, traders said they dismissed news of the Strategic Petroleum Reserve drawdown, pointing out that the release would amount to about 167,000 barrels of oil a day if it is released, as expected, over a 30-day period. That is less than the amount used in a day by a typical refinery.

“Five million barrels, unfortunately, in this market is not enough, given the underlying tension and fear about the (Persian) Gulf,” said Randall Rothenberg, a trader with Dean Witter International Energy Futures Group Inc.

On Thursday, Energy Secretary James D. Watkins told a House subcommittee that he would have preferred releasing 15 million barrels of oil from the Strategic Petroleum Reserve at a much faster rate of 500,000 barrels a day as a more useful test of the system. However, federal laws restrict the test drawdown to 5 million barrels.

The $40.10-a-barrel peak was the highest U.S. price for light crude since futures contracts began trading on the New York Mercantile Exchange in 1983. The peak also surpassed the previous record U.S. cash price of $39.80 a barrel for comparable oil, the U.S. benchmark West Texas Intermediate grade, in March, 1980, just after the Iranian revolution, according to Beutel.

However, taking inflation into account, the $39.80 price is equal to about $65 a barrel today, analysts said.

Prices of crude oil for delivery in later months were also up Thursday, and traders said oil is now likely to rise to $42 to $45 per barrel before meeting any resistance.

The prices reflect the cost of a contract to deliver oil at a specified date. The price of contracts traded on the mercantile exchange is a bellwether for oil trades throughout the nation.

A $1 increase in the price of a 42-gallon barrel of crude oil translates roughly to a 2.4-cents-per-gallon increase in the price of refined products such as gasoline or heating oil. On Thursday, unleaded gasoline for October delivery closed up 2.59 cents a gallon at $1.0269. Home heating oil for October delivery closed up 1.8 cents a gallon at $1.0437.

Prices for grades of foreign oil have traded above $40 in the past; in Europe, prices for the benchmark North Sea Brent crude grade have traded above $40 in the last week or so.

On Thursday, traders may also have reacted to word from Saudi Arabia’s former oil minister, Ahmed Zaki Yamani, who told reporters in London he thinks that oil could shoot above $100 a barrel if Saudi oil fields suffer damage in a Middle East war. However, he added that he doubts Iraq’s ability to damage those fields.

If peace is negotiated, he said, prices could fall drastically if high inventories are not drawn down quickly.

The 21 member nations of the International Energy Agency will meet today in Paris to discuss whether to follow President Bush’s lead in releasing oil from strategic stocks.

Testifying before congressional subcommittees, Watkins said the Administration’s intention is to work toward a coordinated stock drawdown, within the framework of the International Energy Agency, of about 1 million barrels a day if and when oil supplies are actually disrupted. He added that the United States is prepared to coordinate with IEA members in drawing down strategic stocks.

Thursday’s rapid increase in crude oil prices surprised those who had expected the President’s announcement to stabilize a runaway market.

White House spokesman Marlin Fitzwater told reporters, “I shouldn’t have said that” when asked about his statements the previous night indicating that the reserve drawdown was expected to dampen oil price increases.

He added: “We wanted to send them (traders) a message, and the message was sent. The test was designed to show we could get the oil to the market” should a real shortfall occur.

Watkins said the move was intended to “put the (Strategic Petroleum Reserve) . . . at optimum readiness to open the spigot if the President so orders.” He added: “The psychological impact is significant, but we are not going into the test with the expectation it would bring the price of oil down” by a significant amount.

Still, analysts said the President’s announcement may have had an effect.

“The way to think about this is that prices would have been even higher had he not done this,” said Philip K. Verleger Jr., a leading oil industry economist with the Institute for International Economics in Washington. “This means that oil will probably be $2 a barrel lower than they might otherwise have been.”

“It is a significant symbolic move,” Beutel added. “It’s putting traders on alert that they should think not only about the possibility of losing Saudi production but also of the possibility that crude oil supplies will arrive from various strategic reserves . . . and that maybe it’s not just a one-way market anymore.”

Times staff writers Robert Shogan, in Cleveland, and Oswald Johnston, in Washington, contributed to this story.

AN ENERGY TEST: The oil reserve sale will help determine U.S. readiness. A20