The price of oil has risen steadily as protests have escalated around the MIddle East
Libya unrest unnerves oil markets as supplies seriously disrupted
RIYADH // Unrest in Libya has unnerved oil markets, accelerating a strong underlying price rally that is entering its seventh month.
This week's surge in oil prices to 30-month highs approaching US$120 per barrel for European Brent and $103 for the US West Texas Intermediate crude is a response not only to Libyan supply disruptions but also to concerns that the wave of political unrest in the Middle East and north Africa could affect exports from one of the region's larger oil producers.
"The Middle Eastern news is obviously contributing to the rise, there's no doubt about it," Jonathan Barrat, the managing director of Commodity Broking Services in Sydney, told Bloomberg News yesterday.
Brent crude has risen more than 7 per cent this week and is likely to rise further if the Libyan situation shows no sign of speedy resolution.
The north African state's National Oil Corporation has declared force majeure on exports, a rare move for any country and usually a precursor to a total production shut-down.
Barclays Capital estimates that about 1 million barrels per day (bpd) of Libyan oil output, or about 80 per cent of the country's total production capacity, has already been halted.
European energy companies including France's Total, Austria's OMV, Italy's Eni and Germany's RWE and Wintershall have scaled back their oil and gas operations in Libya, evacuating expatriate staff from the country.
China National Petroleum Corporation said it had also "relocated" part of its Libyan-based workforce.
Crude might reach $220 per barrel if further production was curtailed in Libya and neighbouring Algeria, Nomura Holdings analysts said. They joined a growing list of others predicting a surge in price above $150.
Rumours that the embattled Libyan leader Muammar Qaddafi might set fire to the country's oil pipelines to sabotage any successor government is fanning the speculative market frenzy.
But the forecasts for crude's imminent climb into uncharted territory are far from universal.
The dissenting opinions have followed assurances from Opec on Tuesday that its members stood ready to offset any shortage in global oil supplies, and from the International Energy Agency that it would open its strategic oil reserves in oil-consuming countries in such an event.
"There is absolutely no shortage of supply," Ali al Naimi, the Saudi oil minister, told reporters following talks in Riyadh on Tuesday between oil producers and consumers. "When we see a shortage of supply we will rectify it immediately."
Mr al Naimi said he did not expect crude to reach $150.
Libya has recently pumped less than 1.5 million bpd of crude, representing about 2 per cent of world oil supplies.
This is an amount for which Saudi Arabia and the UAE, with about 4.5 million bpd of spare production capacity between them, could easily compensate by opening their oil taps. James Hamilton, a professor of economics at the University of California, said even a 2 per cent cut in world crude supplies would be far smaller than the previous six geopolitically driven oil disruptions since the Second World War.
The smallest was a 4 per cent supply loss in 2002, when oil strikes in Venezuela coincided with civil war in Iraq.
Until this week, the steady upward march of oil prices since late last August has been reinforced, but not accelerated, by events in the Middle East.
Oil moved up on December 18, the day after a Tunisian fruit seller sparked the region-wide calls for political reform by setting himself ablaze. It rallied as the Tunisian protests gathered strength early last month, leading to the country's former president Zine el Abidine Ben Ali to step down on January 14.
Egyptian unrest, culminating in the resignation of Hosni Mubarak as president after 30 years, stoked crude markets further.
None of those events, however, seriously disrupted oil exports from the region.
That is not the case with Libya, an Opec country sitting on Africa's biggest oil reserves.
Even so, Deutsche Bank suggested yesterday that $120 crude would be hard to sustain without serious disruption to Saudi supplies or another independent driver. Prices at that level would slow the global economy, the bank said, allowing crude to lose steam.