Oil hits $100 on Libya fears

Oil prices soared Wednesday to $100 US per barrel amid continued unrest in Libya before closing just above $98.

The rise came despite assurances from Saudi Arabia that it would make up any shortfall in supplies should production or shipments be disrupted.

The April crude contract's climb to $100.01 was its first venture over the $100 level since October 2008.  By the end of the session, it had given up some of that to close at $98.10, up $2.68 in New York.

'Prices could peak above $220 a barrel.' —Nomura Holdings Inc. on crude oil

In London, Brent crude — the European and Asian benchmark — added $5.81 or 5.5 per cent, to $111.59 per barrel on the ICE Futures Exchange.

West Texas Intermediate and Brent crude normally move in lockstep with each other. But WTI has stayed comparatively flat due to a supply glut in the refining and distribution hub of Cushing, Okla., even as Brent has risen due to widening unrest in the oil-rich Arab world.

The rise came after forces loyal to Libyan leader Moammar Gadhafi again opened fire again in the streets of Libya's capital, Tripoli, a day after the longtime leader vowed to defend his rule.

Calgary-based Suncor Energy, which was producing 50,000 barrels per day in Libya, has removed remaining staff from its facilities to safe locations and shut in production, as have other firms.

"Most Suncor expatriate staff left the country between February 21 and 22," spokesman Brad Bellows told CBC News in an email. "Family members of all expatriate employees were also evacuated."

"Employees remaining in Libya are in safe locations and the company has a team of safety professionals in-country to assist our staff and to continue monitoring the evolving situation," he said.

Libya is the world's 18th-largest oil producer, pumping out around 1.8 million barrels per day, or a little under two per cent of global daily output.

The OPEC country also sits atop the biggest oil reserves in the whole of Africa, and as such its ability to affect prices can't be dismissed, a major investment bank noted Wednesday.

"If Libya and Algeria were to halt oil production together, prices could peak above $220 a barrel and OPEC spare capacity will be reduced to 2.1 million barrels a day, similar to levels seen during the Gulf war and when prices hit $147 in 2008," Tokyo-based investment bank Nomura Holdings Inc. was quoted by Bloomberg as saying.

Algeria pumps out more than a million barrels per day, and analysts note that nearly one-fifth of the region's production appears to be shut down. Saudi Arabia tried on Tuesday to calm fears by claiming it was more than capable of making up any shortfall.

But despite Saudi assurances, oil markets remain on edge. Traders are concerned that revolts in Tunisia, Egypt and Libya will spread, disrupting oil exports from the entire region.

Barclays Capital estimates that as much as one million barrels per day have been shut down so far in Libya. The production losses will be felt mostly in Europe. Ireland relies on Libya for 23 per cent of its oil imports and 22 per cent of Italy's oil imports are from Libya. The U.S. imported only about 51,000 barrels per day from Libya, less than one per cent of its total crude imports. Canada is the number one source for the U.S.

Larry Goldstein, a director at the Energy Policy Research Foundation in Washington, D.C., said Libya's oil is a high-quality variety that produces valuable petroleum products like gasoline, jet fuel and diesel.

Some refineries won't be able to run on Saudi Arabia's lower-grade crude, so a sustained shut down in Libya could start a bidding war for comparable kinds of crude.

"That would raise product prices immediately," Goldstein said.

Increase fear-driven

The increase "is really all fear-driven," Tim Evans, an energy trader with Citigroup in New York, told CBC News, 

Besides concerns about actual production cuts, he said, traders have "a more generalized fear of the unknown that the unrest may spread further throughout the Middle East putting additional oil supplies at risk."

"So far, the loss in output is really quite minor. We lost more production last month when the Trans Alaskan pipeline was shut due to a leak than we're losing so far from Libya," said Evans.

"It's not so much the direct impact of the volume of oil being lost right now, it's really the fear that this unrest could swell further and put additional volumes of oil in jeopardy."

"Have we put too much of the risk premium into the price?  Perhaps, but we don't know," he said. "What I can say is that the risk premium is still expanding."

"Geopolitical events are notoriously difficult to forecast. Libya could stabilize over the next few days. We could see Moammar Gadhafi step down, or be pulled down, and the fear could subside."

"On the other hand," Evans said, "we could be looking at any number of more dramatic scenarios.  First it's Libya, and then it's Algeria and then, a month from now, Iran, with more and more volumes of oil put at risk. The range of possibilities is enormous."

On the TSX, the energy index rose 1.3 per cent as investors moved into Canadian oil companies, while the overall S&P/TSX composite index was down 7.49 points to 13,956.19.

In New York, the Dow was down 107.01 points, or 0.9 per cent, to 12,105.78. The S&P 500 was down 8.04 points, or 0.6 per cent, to 1,307.40 and the Nasdaq composite was down 33.43, or 1.2 per cent, to 2,722.99.

Oil spike threatens recovery

"At this point, the spike in prices is unlikely to have a major impact on drilling or investment in Alberta," said ATB Financial economist Dan Sumner in a commentary, "since prices take time to filter through into economic activity."

"However, the upside to the unfortunate turmoil in the Middle East is that it makes Alberta’s relatively geopolitical risk-free oil plays [particularly the oilsands] look even more attractive to global oil companies." he said.

The sharp rise in oil prices came as a CIBC economist warned that spiking oil and food prices could threaten the fragile global economic recovery.

It's not that the oil prices cause recession, said Benjamin Tal, adding it's what central bankers must do to counteract rising inflation.

If oil remains at elevated levels for four or five months, that could filter through into higher inflation and cause central bankers to start raising interest rates.

Tal also noted that consumers must devote greater portions of their disposable income to pay for food and energy, leaving less available on other purchases.