Libya intervention likely to push oil prices up

Reuters, Sunday 20 Mar 2011

Saudi and Iran issues also key to price stability, says analyst

UN-sanctioned aerial and naval attacks on Libyan air defense and ground forces at the weekend are likely to see oil prices vault higher this week, overcoming demand-side jitters stemming from Japan's earthquake and Chinese monetary tightening.

French planes fired the first shots in what is the biggest international military intervention in the Arab world since the 2003 invasion of Iraq, destroying tanks and armored vehicles in the region of the rebels' eastern stronghold, Benghazi.

On Monday, Brent crude, which closed at US$113.93 a barrel on Friday, could target a February peak of $119.79 a barrel. U.S. crude, which closed at $101.42 a barrel on Friday may also extend last week's 4.2 per cent gain, adding to concerns about inflation around the world.

"The Middle East and North Africa are a powder keg attached to a slow-burning fuse. The attacks on Libya and naval blockade, the troubles in Bahrain which are causing tension between Saudi Arabia and Iran, could cause the whole thing to blow up," said Jonathan Barratt, managing director of Commodity Broking Services.

"The key is really how Saudi and Iran play out. Cool heads need to prevail. It's contained at the moment but if things worsen, you see a Mid East premium very quickly. If they start exchanging fire, it could easily drive the market above the record high."

Simmering tensions in North Africa and the Middle East, sparked by a revolt in Tunisia in January that spread to other nations including Egypt, Yemen, Bahrain and Libya have helped drive up oil prices by around 20 per cent so far this year.

Brent crude traded at almost $120 a barrel, its highest since a spike to just below $150 in mid-2008. So far in March, Brent has risen just two per cent on expected lower demand following the Japan earthquake and eased on Friday after two days of gains, as Libya declared a ceasefire, easing the threat of further damages to oil facilities.

Oil production in the nation, the world's twelfth biggest exporter, has fallen dramatically since the unrest started -- down from around 1.6 million barrels per day to around 400,000 barrels.

Oil exports have slowed to a trickle, but they will likely dry up as military action continues.

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