Oil prices hit fresh highs on Libya unrest fears

Thursday, Feb 24, 2011

Oil prices have continued to climb, hitting their highest levels in two-and-a-half years, amid fears the unrest in Libya could spread to larger oil producing nations and disrupt supplies.

Brent crude hit $119.79 a barrel in early Thursday trade, before falling back to $116.80.

US light crude was up $3.65 at $101.80 a barrel, but earlier it had reached $103.41.

Oil firms have been suspending production in Libya this week.

France's Total, Spanish oil firm Repsol and Italy's ENI have all partly suspended operations.

Austrian firm OMV also suspended operations and Germany's Wintershall said it had shut down operations which produced up to 100,000 barrels of oil per day.

Market reaction

The last time prices were this high was in August 2008 and analysts are predicting more gains may be on the way.

European shares fell on Thursday, extending losses for the fourth consecutive session as investors expressed concern about the impact of the oil price spike on global growth.In London, the FTSE 100 was down 0.6% at 5886.16, while in Germany the Dax was 1.15% lower at 7111.82.

"The general unrest in the Middle East has knocked all the confidence out of the market," said Mark Priest, an equities trader at ETX Capital.

"We can not see a turnaround unless suddenly the situation is resolved in Libya," he added.

The high oil price also weighed on Asian stock markets. Japan's Nikkei 225 index lost 0.9% while South Korea's KOSPI shed 0.7%.

Supply worries

Oil prices have been rising for months, but the uprising in Libya has caused a sharp increase in crude costs.

Libya is the world's 12th-largest exporter of oil, with the majority of its output going to Europe.

According to the International Energy Agency, Libya produces 1.6 million barrels per day of crude.

Barclays Capital estimates that so far about one million barrels per day of production has been shut down.

On Tuesday, Saudi Arabia's Oil Minister Ali al-Naimi had tried to reassure markets that his country's spare production capacity could help to "compensate for any shortage in international supplies".

Saudi Arabia has 4 million barrels per day of spare capacity which it can bring online if needed.

Spare capacity

Investment banking firm Goldman Sachs said that another regional disruption could create severe oil shortages and require demand rationing.

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

Analysts say that if oil prices keep climbing, it could push up the cost of fuel and food. This would hit consumers in the pocket and could result in slower economic growth and weaker corporate earnings.