Oil prices rose to a two-year high on Tuesday as supplies remained choked off from strikebound Venezuela and the looming threat of war in Iraq continued to stoke fears of disruptions to Middle East crude flows.

US light crude hit a peak at $32 a barrel, the highest since January 2001 and a jump of $5 since workers in Venezuela began a strike against President Hugo Chavez at the beginning of December.

At 0609 GMT, February crude futures on the New York Mercantile Exchange had eased slightly to $31.80, up five cents from Monday's settlement.

Oil has surged 60 per cent this year, raising concerns that a run up in energy costs could endanger the fragile global economy.

"It's a drag on economic growth. It's a tax on consumers and businesses and general geo-political tensions mean that investors are more reluctant," said Frank Packer, senior economist at Nikko Salomon Smith Barney in Tokyo.

Benchmark crude prices in London and New York leapt almost $1.50 a barrel on Monday after the United States and Britain indicated at the weekend that the prospect of war in Iraq was increasingly likely in early 2003.

Adding to war speculation, Iraqi forces shot down an unmanned US spy plane in the southern 'no-fly' zone in the first downing of a US aircraft since a UN resolution last month gave Iraq a final chance to disarm of weapons of mass destruction or face a military attack.

Baghdad denies any stockpiling of biological, chemical or nuclear arms.

Iraq is the world's eighth-largest oil exporter, selling about two million barrels per day overseas. Traders also fear any war may disrupt crude supplies from other producing countries in the Middle East, which pump a quarter of world oil needs.

Independent oil analyst Simon Games-Thomas in Sydney said the latest price spike was likely to put the US government under increasing pressure to release crude from the nation's 599 million barrels of emergency reserves.

"There will be political pressure to protect the US economy. They won't want oil to hammer any economic recovery," said Games-Thomas.

The strike in Venezuela, which has crippled oil exports from the fifth biggest exporter for more then three weeks, has crimped about 13 per cent of US petroleum supplies at a time when demand in the biggest oil consumer is rising to a winter heating peak.

Venezuela's crude production has plummeted to under 200,000 bpd since the opposition-led strike began on December 2 from just above three million bpd in November.

The impact of the Venezuela outage is likely to appear in data released late every Tuesday by the American Petroleum Institute on the health of US commercial fuel stocks.

Six analysts polled by Reuters on Monday forecast the API figures to show an average fall of 3.75 million barrels in US crude inventories in the week to December 20.

Stocks of distillates, which include key heating oil, were expected to drop by 1.5 million barrels, while gasoline tanks were seen down by two million barrels.

Top oil exporter Saudi Arabia said on Saturday that the OPEC producers' cartel remained committed to fair oil prices and plugging any supply shortages.

The 11-member Organisation of Petroleum Exporting Countries accounts for two-thirds of global oil exports.

Under an informal output mechanism, OPEC aims to keep the price of a basket of reference crudes in a target band of $22 to $28 a barrel by increasing supply by a minimum 500,000 bpd if prices rise above the top end of the range for 20 working days.

OPEC's basket price stood at $29.64 a barrel on Friday, before the price rally this week.