US oil heads towards $42 per barrel but investors jittery

US oil prices rose towards $42 a barrel on Tuesday, underpinned by worries over disruptions to Middle East supplies at a time when world producers are virtually pumping flat out to meet robust demand.
US light crude climbed to $41.77 a barrel, within 70 cents of a 21-year peak of $42.45, the highest price since crude futures were launched on the New York Mercantile Exchange in 1983.
Prices had eased to $41.62, down 2 cents. Dealers said prices were approaching key levels where investors were likely to sell to cash in profits. Speculative hedge funds have been seen buying oil in the last couple of weeks as the US dollar has weakened.
"On a risk reward basis, it gets a little tough to buy here, it could turn very quickly," said John Brady, an energy broker at ABN Amro in New York.
US oil prices have surged $6, or 17 percent, in the last three weeks on concerns that a lack of spare production capacity has left supplies vulnerable to a major disruption at a time when demand is growing at the fastest rate in more than two decades.
Militant attacks in Saudi Arabia, the world's biggest oil exporter, and Iraq have also raised concerns of a major supply disruption. Saboteurs attacked another oil pipeline in northern Iraq on Monday, but exports from the south of the country remained stable at about 1.7 million barrels a day (bpd).
In June, Iraqi exports stopped after a sabotage attack on southern pipelines running to the key Basra oil terminal. The London-based Centre for Global Energy Studies (CGES) said in a report that Iraq remained a major concern in the supply chain.
"The CGES believes that a total cessation of Iraq's oil production for any length of time remains very unlikely, but intermittent disruptions are expected to continue," it said.
"As a result, Iraq may struggle to sustain its current level of production over the coming months, leaving Saudi Arabia to make up the shortfall." Saudi Arabia is the only member of the Organisation of the Petroleum Exporting Countries (Opec) with any significant spare production capacity.
Opec is due to raise its official output ceiling by 500,000 bpd from August 1 to 26 million bpd, although the group's actual production is estimated to be roughly 2 million bpd above that level as producers pump flat out to stem this year's price rally.