Tokyo-based Nomura: Oil prices may hit $220 a barrel

By Matt Egan
Fox Business
February 23, 2011

If the turmoil paralyzing parts of the Middle East and North Africa brings oil production in Libya and Algeria to a standstill, it could cause crude oil to explode to $220 a barrel, derailing the global economic recovery.

According to a new report from Tokyo-based Nomura, a simultaneous production halt from embattled Libya and neighboring Algeria would reduce OPEC spare capacity to 2.1 million barrels a day and may cause crude to spike from about $97 a barrel today to $220 a barrel.

“The closest comparison is the 1990-1991 Gulf War,” the Nomura analysts, led by Michael Lo, wrote, saying crude prices leaped 70% in seven months when OPEC’s spare capacity was cut to just 1.8 million barrels a day during that conflict with oil-rich Iraq.

While the $220 figure may sound high, Nomura said it could be an underestimate as speculative oil traders who were not around during the Gulf War may exaggerate the surge during an oil production halt.

The turmoil in Algeria hasn’t gotten nearly as much attention, but that government is also believed to be very vulnerable and recent protests have led the government there to lift its state of emergency.

The report comes as Wall Street has grown increasingly fearful the violence slamming Libya, Africa’s third-largest oil producer, will eat into the global economic recovery.

Even though the global economy has strengthened considerably in recent months, it’s clear $220 oil prices would seriously hurt growth, putting a huge burden on cash-strapped consumers and businesses, especially transportation companies like shipping giant FedEx (FDX: 89.25, 0.00, 0.00%), airliner JetBlue (JBLU: 5.70, 0.00, 0.00%) and cruise operator Carnival (CCL: 42.06, 0.00, 0.00%).

Crude’s expiring March contract spiked 8.5% — its biggest one-day gain since April 2009 — to a 2 1/2-year high of $93.57 on Tuesday in response to the turmoil in Libya. The surge in oil prices sent the Dow Jones Industrial Average tumbling 178 points, its steepest decline since November.

With no resolution in sight, crude continued its gains on Wednesday, with the commodity’s April contract jumping $2.16 a barrel, or 2.30%, to $97.58. Brent crude continues to vault ahead of crude, surging another $3.92 a barrel, or 3.71%, to $109.70.

According to Bloomberg data, Libya pumped 1.59 million barrels of crude a day last month, while Algeria pumped 1.25 million barrels a day.

The markets have been pricing in the possibility the crisis in Libya will break out into an all-out civil war as longtime Libyan leader Muammar al-Qaddafi has refused to step down. In a televised speech on Tuesday, he said, “I will fight to the last drop of my blood.”

Citing a source close to the al-Qaddafi regime, Time Magazine reported late Tuesday the leader has ordered security services to start sabotaging oil facilities. The forces plan to blow up several oil pipelines, cutting off flow to Mediterranean ports, the report said.

According to Italian authorities, the death toll during the political unrest in Libya may have jumped to about 1,000.

Oil on its way to $200 a barrel

  • Crude climbed up to $110 today due to what experts say is the effects of Libyan and Middle East unrest.
  • Oil insider Lindsey Williams says it´s just the beginning. “Unrest and oil prices will completely collapse U.S. Dollar in 2012.”
  • Oil companies will open massive U.S. reserves to cope with lack of oil for local consumption.

Reuters
February 23, 2011

Oil futures rallied above $110 a barrel on Wednesday, posting the biggest three-day percentage gain in a year, as the escalating violence in Libya could further reduce its production.

Between 300,000 and 400,000 barrels per day of Libyan output — up to 25 percent — has been shut down, according to Reuters calculations, marking the first cut in oil supplies related to the recent wave of anti-government unrest in North Africa and the Middle East.

After Libyan leader Muammar Gaddafi vowed in a defiant speech on Tuesday that he would not step down, promising severe punishment to his detractors, analysts fear that long-lasting supply disruptions or even permanent damage lies ahead for the OPEC member’s oil industry.

Traders were intently watching what top OPEC exporter Saudi Arabia will do, even as its oil minister has reiterated assurances the kingdom and other OPEC members would be ready to act should a supply shortfall develop.

“I don’t think Libya alone will take us to $150 a barrel, but, if unrest spreads in the Gulf countries, we could easily get there. That is why it is imperative the Saudis release some extra barrels into the market now to calm the situation, rather than simply trying to talk the price down,” said Edward Meir, an analyst at MF Global in New York.

In London, ICE Brent crude for April delivery gained $4.01, or 3.8 percent, at $109.79 a barrel. Earlier, it touched a session high of $110.35, the highest since September 2, 2008, when prices hit $110.45.

In three days, the Brent contract has surged nearly $8, or 7.8 percent, the biggest three-day percentage advance since February 2010.

In New York, the new front-month, April crude rose $2.48, or 2.6 percent, to $97.90 a barrel. It earlier reached $98.07, the highest intraday price since October 2, 2008, when prices hit $100.37.

Since resuming trading on Tuesday, following a long holiday weekend, U.S. crude has advanced nearly $12, or nearly 14 percent, the biggest two-day percentage gain since January 2009.

Brent’s premium against U.S. crude widened to as much as $12.84, after posting $10.36 at the close on Tuesday.

Traders were gearing up for U.S. weekly inventory data, the first of which will be released by the industry group American Petroleum Institute later Wednesday at 4:30 p.m. EST.

A Reuters poll forecast that U.S. crude stockpiles rose 1.3 million barrels last week, while distillate inventories fell 1.4 million barrels and gasoline supplies rose 400,000 barrels.