Oil Prices Rise On Libya Airstrikes

03/21/2011 08:16 am ET | Updated May 25, 2011

LONDON (By Jessica Donati) - Oil prices rose by $2 a barrel on Monday as a wave of U.N.-mandated airstrikes on Libya and proliferating unrest in the Middle East fanned concerns about oil supply from the region.

Brent crude for May was up $2.21 to $116.14 a barrel by 1044 GMT (6:44 a.m. ET), while U.S. crude for April gained $2.13 at $103.20 a barrel.

"With the nature of the external military involvement becoming clearer, there is a further escalation of the situation, and the damage to infrastructure might be larger, keeping Libya out of the oil market for longer," said Amrita Sen, an analyst at Barclays Capital.

Unrest flared in even the most authoritarian regimes in the Middle East over the weekend. In Syria, crowds set fire to ruling Baath Party headquarters, its main courts complex and phone company branches in an uprising that has resulted in at least four deaths over the past week.

In Yemen, the killing of dozens of anti-government demonstrators prompted the country's ambassador to the United Nations to resign in protest on Sunday.

A powerful Yemeni general expressed support on Monday for protesters demanding that the veteran head of state step down, referring to recent resignations of political and military figures but stopped short of announcing his own resignation.

Tension also increased between Bahrain and Iran as tit-for-tat diplomatic expulsions followed Tehran's anger at last week's crackdown on Shi'ites. On Monday, Bahrain's king announced a foreign plot had been foiled and thanked fellow Sunni-ruled neighbors, notably Saudi Arabia, for their support.

"The key is really how Saudi (Arabia) and Iran play out. Cool heads need to prevail. It's contained at the moment, but if things worsen, you see a Mideast premium very quickly," said Jonathan Barratt, managing director of Commodity Broking Services.

Saudi Arabia, a U.S. ally, has not seen the kind of mass uprisings that have rocked the Arab world this year, but dissent has built up as unrest has taken root in neighboring Yemen, Bahrain and Oman.

Dozens of Saudi men gathered outside the Interior Ministry in the capital Riyadh on Sunday to demand the release of jailed relatives amid a heavy police presence. Saudis have been warned protests will not be tolerated because they violate the Koran's teachings.

PROTRACTED WAR

Headlines from Japan's troubled nuclear reactor revived worries about the country's economy as authorities warned a turning point had not yet been reached, balancing against bullish news from the Middle East.

"The market is very headline driven and we don't know what the next headline from Libya or Japan will be," said Olivier Jakob, an oil analyst at Petromatrix.

U.N.-backed strikes led by the United States, the UK and France raised the stakes in a civil war that has cut Libya's oil output to less than a quarter of the previous 1.6 million barrels per day (bpd), nearly paralyzing shipments abroad from what used to be the world's 12th-largest crude exporter.

"The main question for the oil markets is how long production outage could last ... We could end up by having two countries or a protracted civil war. We assume Libyan oil exports will be zero for the next six months," said Mike Wittner, Head of Commodities Research at Societe Generale.

Western air strikes in Libya are likely to last "a while yet", but it is up to Libyans and not the international community to decide what course the country takes, a top adviser to the French president said on Monday.

Gaddafi's control of oil infrastructure in the long term could mean deals with foreign oil companies are reshaped in favor of countries not participating in the attacks.

Libya is considering offering oil block contracts directly to China, India and other nations it sees as friends, Libya's top oil official said on Saturday, instead of an open bidding processes.

China, India, Russia, Brazil and Germany were the five nations that abstained in last week's U.N. vote to authorize the use of force against Gaddafi. The other 10 members of the Security Council voted in favor.

The weekend's military intervention to protect civilians caught up in a one-month-old revolt against Gaddafi drew criticism from Arab League chief Amr Moussa, who questioned the need for a heavy bombardment he said had killed many civilians. (Additional reporting by Alejandro Barbajosa in Singapore; editing by James Jukwey and Jane Baird)

Copyright 2010 Thomson Reuters. Click for Restrictions.

YOU MAY LIKE