Oil nears $116 as analysts forecast another price spike

LONDON, Friday

Oil prices rose with Brent crude near $116, and analysts saw the risk of another price spike as unrest bubbled across the Middle East and western powers continued a military campaign in Libya.

Yesterday’s protests were planned in Yemen and Bahrain, and investors kept a close eye on Syria, where at least 37 have died following protests against the government of President Bashar al-Assad.

Western warplanes struck Libyan ground forces, pursuing a campaign that has yet to deliver a crippling blow to Muammar Gaddafi’s tanks and artillery.

Brent crude for May rose five cents to $115.77 a barrel, about $4 from a 2-1/2-year high just below $120 reached a month ago. US crude rose 20 cents to $105.80.

Libyan oil exports of about 1.3 million barrels per day (bpd) have virtually vanished, eroding global spare capacity as Saudi Arabia and other members of the Organisation of the Petroleum Exporting Countries have increased production.

This has heightened talk of the risk of higher prices as unrest continues across the Middle East and North Africa, which combined produce more than a third of the world’s oil.

"My gut feeling is that the oil market is more likely to go up than down," said Tony Machacek, a broker at Bache Commodities in London. "There are so many unknowns that could hit supply."

Machacek said the ICE Brent options market had "a significant call skew," indicating that "generally people think there is more risk of movement to the upside."

Reflecting this view, JP Morgan analysts headed by Lawrence Eagles, raised their forecast for Brent in the second quarter to $118 from $105, saying "dips in volatility, like the one that we saw this week, appear to offer good entry points for hedging strategies.

Supply disruption

"So long as ongoing problems in the Middle East continue to elevate risks of a further supply disruption, there is a strong likelihood of a price spike in the second quarter as the market demands additional oil to meet summer demand," JP Morgan said.

Barclays Capital has also raised its projection for 2011 Brent to $112 from $91. JP Morgan said extra Opecsupplies were needed in the run-up to northern hemisphere summer demand, before the producer group’s next meeting in June.

"By then, it will be too late to prevent higher prices and could extend what we see as a mid-quarter blip to a much more serious and destabilising price surge that could distort stock-holding behavior and economic growth," the bank said.

Oil prices will stay above $100 a barrel through 2013, a Reuters poll showed, as analysts sharply revised their forecasts upwards on expectations of a protracted outage in Libya and uncertainty elsewhere.

—Reuters