Oil prices may be jolted higher on Tuesday when key markets reopen from a long holiday weekend that saw the second attack in less than a month on Saudi Arabia, the world's top crude exporter.
Analysts doubt U.S. crude prices will break new ground above the recent 21-year peak at $41.85 a barrel but say the attack in the oil hub of Khobar serves as a sharp reminder of the vulnerability of already stretched global supplies.
"This raises the fear factor. This incident is an escalation since the last attack in Yanbu. This is a bigger oil center and more people were killed," said Tony Nunan, manager of risk management at Mitsubishi Corp in Tokyo.
"Whether prices will hit new highs is a tough call. But it will definitely keep a floor under the market."
Islamic militants killed five foreign workers at a Saudi petrochemical plant in the Red Sea town Yanbu at the beginning of May, and saboteurs have twice targeted oil infrastructure around Iraq's key crude export terminal at Basra.
Khobar, where 22 civilians were killed in the latest attack, has no production, export or refining facilities but western oil firms have offices and housing in the city 400 kilometers (240 miles) northeast of Riyadh.
The kingdom's well-protected energy infrastructure has yet to be struck by sabotage, but some dealers fear emboldened fighters may shift from soft targets to production and export facilities.
Crude oil futures on the Tokyo Commodity Exchange rose 2.32 percent on Monday to 22,890 yen per kiloliter, about $33 a barrel.
London's International Petroleum Exchange (IPE) and the New York Mercantile Exchange are due to reopen on Tuesday. London Brent closed on Friday 35 cents up at $36.60 a barrel. U.S. light crude ended 49 cents higher at 39.93.
The U.S. dollar hit a three-week low against the yen, investors bought gold as a safe-haven and share markets in Asia fell on worries that the attack would propel U.S. oil back to a 21-year peak at $41.85 a barrel struck on May 17.
Saudi Arabia is the world's top exporter of crude oil and is the only producer with any significant ability to increase output as demand seasonally rises in summer and winter months.
State oil giant Saudi Aramco moved swiftly on Sunday to reassure oil markets that it would keep oil supplies running smoothly, currently at more than nine million barrels per day.
"No Saudi Aramco facilities or personnel were affected by the incidents in al-Khobar on May 29, 2004, and normal operations continue at all of the company's installations," Saudi Aramco said in a statement.
"Not one single barrel of our oil has been disrupted since the incident on Saturday," said Saudi petroleum consultant Hassan Yassin on Monday. "We are pumping and exporting the same amount of crude and will continue to do so."
Traders have already priced in a risk premium due to accelerating violence in the Middle East, home to two-thirds of world petroleum reserves. Analysts say between $5 and $8 a barrel reflected jitters of sabotage on oil infrastructure.
"Over the next couple of days oil will probably track higher, but I don't think it will take out the highs we've seen this month," said David Thurtell, commodities strategist at Commonwealth Bank of Australia in Sydney.
"To the extent that infrastructure wasn't hit means no immediate impact on short-term supply," said Thurtell.
The Khobar attack comes five days ahead of a meeting of the OPEC producers' cartel, for which Saudi Arabia has proposed an increase to production limits by between two million and 2.5 million barrels per day to cool sky-high oil prices that threaten to stunt global economic growth.
Prices have shot up about 25 percent since the end of 2003 as violence has escalated in the Middle East and demand has risen faster than expected, especially in Asia and the United States. Low global fuel stocks have also helped drive prices higher.
The Organization of the Petroleum Exporting Countries is already pumping more than two million barrels per day above the existing formal ceiling of 23.5 million barrels per day.
OPEC ministers will meet in Beirut on June 3 to discuss the output rise. Any fresh supply would largely come from Saudi Arabia, which has a capacity to pump about 10.5 million barrels per day.
"This attack has shifted the geopolitical risk up a gear. Saudi is the largest OPEC producer with most of the extra export capacity. Any hit on its infrastructure will be ugly for fundamentals," said an industry source, who declined to be named.
Asia, which sources more than 70 percent of its crude imports from the Middle East, is particularly vulnerable to price spikes and supply disruptions.
"OPEC is going to produce more but spare capacity is very limited. People are terrified of any disruption to pipeline or oil facilities," said a trader at a Japanese trading house.
