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  • February 22nd, 2011

Oil Rises to Two-Year High on Libya Unrest; Goldman Sees Brent at $110

Oil jumped to the highest in more than two years as violence intensified in Libya, stoking concern crude supplies will be disrupted as violence escalates around the Middle East and North Africa.

Futures for April delivery in New York rose as much as 9.8 percent from the Feb. 18 settlement and London-traded Brent surged to the highest since September 2008, as soldiers deserted Libyan leader Muammar Qaddafi’s government and diplomats resigned. Brent may trade between $105 and $110 a barrel in coming weeks if uncertainty continues, according to Goldman Sachs Group Inc.

“Oil is being bought on the risk that this contagion will spread through the Middle East,” Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, said by telephone today. “This effect is a knee-jerk reaction to the fact that this could spread.”

Crude for April delivery rose as much as $8.77 to $98.48 a barrel in electronic trading on the New York Mercantile Exchange and was at $97.78 at 3:33 p.m. Singapore time. On Feb. 18, the contract settled at $89.71. Floor trading was closed yesterday for the U.S. Presidents Day holiday and electronic trades will be booked with today’s for settlement purposes.

The March contract, which expires today, gained as much as $8.29, or 9.6 percent, to $94.49 a barrel. Front-month futures are up 17 percent in the past year.

Brent oil for April settlement on the London-based ICE Futures Europe exchange climbed as much as $2.83, or 2.7 percent, to $108.57 a barrel. It increased 3.1 percent yesterday to $105.74, the highest settlement since Sept. 22, 2008.

‘Contagion Risk’

Oil in London may rise on uncertainty in Libya and reach a record if unrest spreads to larger producers in the Middle East, such as Saudi Arabia, according to Goldman Sachs.

“The real key is the contagion risk,” Jeffrey Currie, the bank’s London-based head of commodities, said in Hong Kong today. “Then prices could test historical highs.”

Libya, holder of the largest crude reserves in Africa, pumped 1.59 million barrels a day of oil in January, equivalent of about 8 percent of U.S. consumption, based on a Bloomberg News survey.

“The big risk for the world is that oil prices skyrocket to, say, $120 a barrel for Brent,” Arjuna Mahendran, the Singapore-based head of investment strategy for Asia at HSBC Private Bank, told Susan Li on Bloomberg Television’s “First Up Asia” program. “That could really cause a mini recession in this consumption upsurge that we’ve seen in the U.S. starting late last year.”

$100 WTI Crude

Crude in New York, which has lagged behind Brent, may rally to $100 a barrel on the Middle East tension and a tightening of global supplies, according to Victor Shum, Singapore-based senior principal at Purvin &?; Gertz Inc., a consultant.

“While there’s been minimal supply disruption, geopolitical tensions have returned to oil markets and after the spectacular oil demand? growth in 2010, we are facing tighter fundamentals,” he told Rishaad Salamat on Bloomberg Television’s “On the Move.”

The oil-options market shows traders have never been less certain whether prices will rise or fall as the political unrest spreads.

Growing speculation the protests will drive oil higher narrowed the difference between the cost of betting on gains and declines to 0.57 percentage point on Feb. 18, an all-time low for June futures, according to data from the New York Mercantile Exchange. That’s down from more than 2 percentage points on Jan. 24, before the violence began escalating around the region.

‘Rivers of Blood’

Libya is the eighth-largest producer among those with quotas in the Organization of Petroleum Exporting Countries, a group that pumps 40 percent of the world’s oil.

Qaddafi said he hasn’t fled the country after government forces attacked protesters and rebels claimed control of Benghazi, Libya’s second-largest city. More than 300 people have died, the International Federation for Human Rights said. Qaddafi’s son, Saif al-Islam Qaddafi, earlier threatened that “rivers of blood” would flow unless the uprising ends.

Shokri Ghanem, chairman of Libya’s National Oil Corp., said he had no information about a disruption in crude production. Al Jazeera reported yesterday that Libya’s Nafoora oil field had stopped producing because of an employee strike.

Anti-government riots that started in Tunisia have also spread through Egypt, Yemen, Algeria, Iran, Djibouti, Bahrain and Morocco. Countries in North Africa and the Middle East were responsible for 36 percent of global oil output and held 61 percent of proved reserves in 2009, according to BP Plc, which publishes its Statistical Review of World Energy each June.

Iran Navy

Two Iranian naval ships entered Egypt’s Suez Canal and headed toward the Mediterranean, Reuters reported today, citing a canal official it didn’t identify. Israel would consider the presence of Iranian warships sailing through the waterway “a provocation,” said Foreign Ministry spokesman Yigal Palmor.

Protests in Bahrain, provoked by discontent among the majority-Shiite Muslim population, have sparked concern the violence will erupt in neighboring Saudi Arabia, which holds one-fifth of the world’s oil. Saudi Arabia has a Shiite minority concentrated in its eastern oil-producing hub.

Source: Bloomberg

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