On the New York Mercantile Exchange, February crude oil futures surged to a two-year-high of $31.95 a barrel on Monday before settling at $31.75 a barrel, up $1.45.
The move was the latest in a rally that has lifted crude oil prices by 25 per cent since mid-November amid concerns about a war with Iraq and, more recently, a strike in Venezuela that has crippled the South American countrys oil output.
Oil prices in New York are 60 per cent higher than they were this time a year ago.
Prices moved above $31 a barrel on Monday after reports that an Iraqi aircraft in the Southern no-fly zone shot down an unmanned US surveillance Drone over Southern Iraq.
With Venezuelan oil off the market and the United States and Iraq edging towards a military confrontation, a growing number of market analysts are predicting oil prices as high as $35-40 a barrel in the short-term.
Even before the Venezuelan strike, Bill OGrady, an oil and gas analyst at brokerage house AG Edwards in St Louis, was looking for oil prices to climb to about $35 on the back of tension in the Middle-east. The Venezuelan situation almost makes it a perfect storm, he said.
Prices were last that high in late 2000. In response, former president Clinton ordered the release of 30 million barrel oil from the strategic reserve, a move the administration defended as an effort to head off winter supply problems.
The Bush administration so far has said it is unlikely to tap the strategic reserve to reverse the spike in prices.