x Abu Dhabi, UAEMonday 22 January 2018

Oil price rises close to $120

Oil prices soar and world markets tumble as widespread violence grips Libya.

A traders watches his screen on the floor of the New York Stock Exchange.
A traders watches his screen on the floor of the New York Stock Exchange.

Oil prices climbed close to US$120 a barrel yesterday as unrest in Libya continued to escalate, sending world stock markets down and raising fears of inflation.

The disruption to oil supplies because of the turmoil in Libya sent prices to their highest since September 2008.

Brent crude futures for April delivery rose more than $8 to $119.79 a barrel before falling back, while West Texas Intermediate, the benchmark US measure, rose $5.31 to highs of $103.41 a barrel.

Analysts warned of a potential drag on global economic growth due to the surge in energy costs.

"There's a key difference here between a rise in prices of oil over six to nine months that's fairly progressive and where everybody gets used to rising prices, and one where the rise in price isn't anticipated and is substantial, which can cause a lot of shock," said Mark McFarland, an economist at Emirates NBD.

Libya produces about 1.5 million barrels per day (bpd) of oil and is the world's ninth-largest producer.

Paolo Scaroni, the chief executive of Eni, told Reuters the strife in Libya has cut the country's oil production by 1.2 million bpd.

A number of investment banks issued predictions that oil prices would continue to rise. In the most dramatic report, analysts from Nomura said prices could almost double to surpass $220 a barrel.

"The closest comparison to the current Mena unrest is the 1990-91 Gulf War," the Nomura report said.

"If Libya and Algeria were to halt oil production together, prices could peak above $220 and Opec spare capacity will be reduced to 2.1 [million bpd], similar to levels seen during the [First] Gulf War and when prices hit $147 in 2008," the report said.

Investors and analysts are looking closely to Saudi Arabia for signs that the world's leading oil producer will step in to supply the market.

"The market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of Opec's spare capacity," Jeffrey Currie, the head of commodities research at Goldman Sachs, wrote in a research note.

Ali al Naimi, the Saudi oil minister, said on Wednesday that Saudi Arabia has 4 million barrels of spare capacity and could raise output to meet any Libyan shortfall.

"When we see a shortage in supply, we will rectify it immediately. We have the means, the supply, we have the crude oil available," Mr al Naimi said.

Oil analysts said it was notable the kingdom stopped short of saying it planned to release extra supplies.

"It's great for market sentiment; it will settle them down a bit but the only way the market will calm down is to see that Saudi is actually doing something about it," said Amrita Sen, an energy analyst at Barclays Capital.

Asian markets fell by more than 1 per cent at the opening of trade yesterday and almost all major global indexes.

More than $1.2 trillion has been wiped from stock market values since the beginning of the turmoil in Libya, according to Bloomberg calculations.

Sven Richter, the frontier markets economist at Renaissance Asset Management in London, warned that rising food prices, which contributed to the unrest in Tunisia and Egypt, may be further exacerbated by the oil price's knock-on effect on fertiliser and transport costs.

The UN Food and Agriculture Organisation's food price index, which tracks the prices for a basket of foodstuffs, was at an all-time high as of its last update at the start of this month.

The likely effect of the oil price increase would be "income redistribution from consumers of oil to producers and suppliers of oil, putting a lot of revenue in the hands of eastern European, African and Middle Eastern countries," Mr McFarland said.

"But for net importers of oil where there are inflationary issues, such as Europe, the UK and India, [this] could have a negative impact on consumers' balance sheets."