Oil prices surge in response to Libya turmoil

Crude oil prices have surged more than 7 percent this morning in New York trading, reaching as high as $98 per barrel, as the chaos in Libya raised fears of supply disruption.

There are also fears that the unrest in Libya – which has now reached its fifth day and has cost hundreds of lives - might even reach Saudi Arabia, the world’s premier oil producer.

Libyan strongman Moammar Gaddafi is facing the possible of his 40-plus-year reign.

“Now that the rioting has spread to Libya and Iran, the price of Brent crude oil and WTI oil have jumped, and so have traders’ risk,” said Sam Stovall, chief investment strategist at S&P.

”We acknowledge that a lengthy disruption in Libyan oil production could wreak havoc on world oil markets in the long term. Near term, however, we are comforted somewhat by oil inventories that could cover a 50-60 day Libyan disruption... What’s more, … Saudi Arabia, Kuwait and the United Arab Emirates have the spare capacity to replace much of what could be lost by a Libyan shutdown.”

However, any risk to Saudi production would raise alarms all over the world.
Win Thin, global head of emerging markets strategy for Brown Brothers Harriman, was quoted as saying that markets have always relied on Saudi Arabia to act as the swing producer, boosting output if supplies were disrupted elsewhere.”

The International Energy Agency (IEZ) said it stands ready, as always, to make oil available to the market in the event of a major supply disruption if alternative supplies cannot readily be made available via normal market mechanisms.

OPEC also assured it will hold an emergency meeting to raise its output if necessary.

Meanwhile, the situation in Libya becomes increasingly precarious.

David Hartwell, a London-based analyst at HIS Global Insight, believes Gaddafi’s days are numbered.
“Colonel Muammar al-Gaddafi's hold on power in Libya is now as tenuous as it has ever been during his 42 years as leader of the country,” he said. “Defections by military units, diplomats, tribal groups and even cabinet ministers have left him isolated and increasingly reliant on brute military force to regain control of the country. Foreign companies have evacuated thousands of staff as the uprising threatens to do long-term damage to Libya's operational environment.”

Hartwell adds that there appears to be no way back for Gaddafi “and events have now reached a point where nothing less than his removal will end the violence in Libya.”

Regarding Libya’s oil economy, Hartwell indicated that although production has not yet been disrupted, the “potential for temporary outages remains strong, affecting domestic electricity supplies. As yet, gas pipeline exports to Italy have also remained unaffected. Should the violence escalate further however, clearly there is enhanced potential for serious outages and consequent knock-on effects for global prices.”