Oil prices yesterday surged above $77 a barrel in London after British energy giant BP began shutting down production in an Alaskan oil field that produces about eight per cent of US crude.

Political tensions in the Middle East also kept traders on edge.

September-dated Brent contracts rose $1.05 at $77.22 after touching a high of $77.73 earlier. Meanwhile, August-dated US light crude futures were up $1.36 at $76.12.

BP, and its American chairman and president Bob Malone, said late on Sunday it had begun closing the Prudhoe Bay field in Alaska for an indefinite period of time after discovering severe corrosion and a small pipeline spill on a transit oil line.

An estimated 400,000 bpd (barrels per day) of oil will be taken off the market following the shutdown. That's close to eight per cent of US oil production - or about 2.6 per cent of US supply including imports -according to the Energy Information Administration.

"We believe the physical market is well supplied and should absorb the Alaskan outage. However the outage further reduces the global spare capacity buffer," Citigroup said.

The bank estimated that after taking into account Nigerian problems 'effective' spare capacity, which was at two million globally, will now fall closer to 1.6 million bpd.

The Alaskan shutdown comes at a bad time for the oil industry, with prices already being pushed higher by the Israeli offensive against Hezbollah militants in Lebanon and by the ongoing Iranian nuclear dispute.

Iran said on Sunday that it would not freeze uranium enrichment and warned it could even expand its nuclear programme, which the West fears is a cover for efforts to build an atom bomb.

"On the geopolitical side, although the fighting in Lebanon is intensifying, it still remains localised. The Iranian situation, on the other hand looks different to us," said Man Financial analyst Ed Meir.

Iran has until August 31 to comply with a UN resolution that it halt uranium enrichment or face unspecified sanctions. Traders fear sanctions might lead to severe disruptions to global oil supplies.

"Because it is unknown what shape these sanctions could conceivably take, that uncertainty should be enough to spur crude prices higher, particularly as the month-end deadline nears," said Mr Meir.

Oil prices surged to record highs above $78 last month on fears the fighting in Lebanon could spread and draw in oil producers like Syria and Iran - both backers of Hezbollah.

They remain very near those records at present, supported by hurricane fears in the US, strong global demand, violence in the Middle East and production outages in Nigeria, Africa's biggest oil producer.

Jim Wood Smith, head of research at Christows, said: "The latest rise in the oil price raises all kinds of problems for the world's central bankers.

"With inflationary pressures building from day to day, almost wholly directly or indirectly attributable to the oil price, the central bankers are facing the dilemma of how far they have to raise interest rates to dampen this just as the consumer starts to feel exactly the same pains.

"Last week showed that the Bank of England Monetary Policy Committee and European Central Bank are prepared to risk growth in order to attack inflation and we find out tonight whether the Federal Reserve will post its 18th straight rise in US rates. The market is betting on a pause, though it would be very brave, or foolish, to take this for granted."