LONDON, Feb 10: Oil prices fell back here on Monday after a Franco-German push to thwart war in Iraq triggered profit taking after the market had earlier chased up to new two-year highs.

The price of benchmark Brent North Sea crude oil for March delivery fell to $32.18 from $32.34 at the close of trading the previous session, after earlier rallying to a high of $32.70 — a level not seen since November 2000.

In New York, the reference light sweet crude March contract fell 25 cents to $34.87 a barrel after closing on Friday at its highest level for two years and five months.

Traders said the market had been hit by profit taking following recent sharp gains, as hopes that a war in Iraq could be averted even at this late stage were rekindled.

GNI oil trader Paul Goodhew said prices had fallen amid a belief that “something would happen towards a peaceful settlement” in Iraq.

However, he stressed that such hopes were more the result of speculation than “anything concrete”.

Earlier on Monday NATO was plunged into one of its worst-ever crises as France and Belgium, backed by Germany, who are all opposed to war on Iraq, blocked Washington’s bid to launch military planning to defend fellow member Turkey.

The French-led move followed reports that Germany and France will deliver a series of proposals to disarm Iraq by peaceful means to the United Nations on February 14.

That plan was welcomed by Moscow but drew an angry response from Washington with US President George W. Bush warning Sunday that the United Nations faced a “moment of truth” with respect to Iraq.

The developments come just days before chief UN weapons inspectors Hans Blix and Mohamed ElBaradei are scheduled to deliver a key report to the Security Council on Friday.

Despite the slide in prices Commerzbank analyst David Thomas believes there is little reason to believe that the support for oil prices provided by Iraq would diminish ahead of Blix’s report.

Blix and ElBaradei said they saw “good progress” from Iraq in cooperation with UN disarmament demands after two days of talks with authorities in Baghdad.

“Clearly Blix is going to report significant progress with Iraq,” said GNI-Man Financial analyst Lawrence Eagles.

But Eagles added that it remained to be seen whether Washington would be prepared to give the inspectors any more time.

Analysts said that aside from the ongoing threat of war, a squeeze in supplies of refined oil products was likely to continue to buttress crude prices in the coming days.

“We’ve seen a big ramp-up in product prices (heating oil, gas oil and gasoline) in the last five days, it really has increased substantially,” he said.

Barclays Capital analyst Kevin Norrish added that there were now real fears of distillate fuel shortages in the United States.—AFP