Oil industry braces for fallout as Libyan protests escalate

Prices rise above US$90/barrel

Oil-consuming nations have emergency reserves they can use to stabilise markets in case the violence in Libya and the wider Middle East escalates and crimps production, officials said Monday.

But international executives and analysts meeting in London were nervously watching developments in the oil-rich region, worried about the sharp shock political unrest is giving to crude oil prices.

Oil prices jumped on Monday because of the ongoing turmoil in Libya, where Moammar Gaddafi's son, Seif al-Islam Gaddafi, warned protesters on Sunday that they risked igniting a civil war in which Libya's oil wealth "will be burned".

Oil prices jumped by more than US$4 a barrel on Monday amid investor concerns that violent protests spreading in Libya could disrupt crude supplies from the OPEC nation and affect other oil-rich countries in the region.

By late afternoon in Europe, benchmark crude for March delivery was up to US$90.23 a barrel in electronic trading on the New York Mercantile Exchange. The contract settles at US$86.20 on Friday.

US markets, including Nymex floor trading, were closed Monday for the Presidents' Day holiday and the thin trading volumes had the potential to amplify price fluctuations.

In London, Brent crude for April delivery gained US$2.37 to US$104.89 a barrel on the ICE Futures exchange.

Libya alone exports at least one million barrels of crude a day. Even more worrying for markets is potential contagion, or the spreading of the political violence to other countries in the Organisation of Petroleum Exporting Countries - key exporters Saudi Arabia and Kuwait are considered potential flashpoints.

David Fyfe, head of the oil industry and markets division at the International Energy Agency (IEA), stressed that the IEA member countries reserves of 1.6 billion barrels of oil - equivalent to some four million barrels per day for the next 12 months - that could be brought on to the market if necessary.

The IEA's 28 members are mainly oil-consuming industrial nations such as the United States, Japan, Britain and Germany.

The IEA has used government stocks to steady the oil market only twice before, during the Gulf War in 1991 and after Hurricane Katrina hit the Gulf of Mexico in 2005.

"It's very much a last resort, but it's worth pointing out that it exists and has been used before when supplies have been disrupted," he said.

"It's a sort of insurance policy for the market. Our view is that it isn't something that should be used for price management," he said.

Fyfe said the situation in the Middle East and North Africa was "of real concern," noting that the region accounts for 60 per cent of global oil resources and 40 per cent of global gas resources.

"Compared to Tunisia (a minor crude exporter) or Egypt (not an exporter but a transit country), instability in Libya is a major concern to the oil industry," said analysts at JBC Energy in Vienna.

David Buik, markets analyst at BGC Partners in London, noted that Seif al-Islam Gaddafi's comments that there would be "rivers of blood" in Libya had also prompted a surge in gold prices to just above US$1,400 an ounce.

"There was a feeling by unsettled investors of a need to take yet another flight to quality," he said.

BP has suspended operations and is evacuating around 40 expatriate staff and their families amid the escalating violence - halting operations in the North African country just four years after the British company returned from a 30-year hiatus.

"Events in the Middle East are of intense concern as they continue to evolve," Ian Smale, group head of strategy and policy at BP PLC, said at International Petroleum Week, a key event on the oil industry's calendar.

"With specific regard to Libya, our first concern is our people and the security and integrity of our operations," Smale said at the Energy Institute-sponsored conference in central London.

- AP