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A Libyan soldier surveys the damage to an administrative building hit by a missile late Sunday, March 20, 2011 in the heart of Moammar Gadhafi's Bab Al Azizia compound in Tripoli, Libya. (Jerome Delay)
A Libyan soldier surveys the damage to an administrative building hit by a missile late Sunday, March 20, 2011 in the heart of Moammar Gadhafi's Bab Al Azizia compound in Tripoli, Libya. (Jerome Delay)

Raids on Libya boost oil prices Add to ...

The Western air raids on Libya had a predictable effect on the already nervous commodity markets: Oil prices rose. But not as much as some had feared, with both Brent and West Texas Intermediate crude rising just over 1 per cent, and closing trade below their highs of the session.

Failure of both Brent and U.S. crude prices to reach Friday's intraday highs, the approaching expiration Tuesday of the U.S. April crude contract and lingering concern about oil demand in Japan as it deals with its post-earthquake nuclear reactor crisis helped pull oil down from its early peak.

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Total crude trading volumes remained well below average, continuing last week's trend and underscoring the uncertainty facing the market and diminished open interest, brokers and analysts said.

Brent crude futures for May delivery rose $1.03, or 0.9 per cent, to settle at $114.96 (U.S.) a barrel, off its intraday peak of $116.22.

U.S. crude futures for April delivery rose $1.26, or 1.25 per cent, to settle at $102.33 a barrel, off its high of $103.35. The April contract expires on Tuesday.

The International Energy Agency, based in Paris, warned before the allied air strikes began that Libyan oil production will remain off the market "for a considerable time," by which it meant "months rather than weeks" because of inevitable damage to Libyan oil facilities and international sanctions against the Col. Gadhafi's government in Tripoli.

Libya is the world's 17th largest oil producer and third largest in Africa. The country normally pumps about 1.6-million barrels a day - equivalent to 2 per cent of global consumption - the vast majority of which is exported to Europe. Two-thirds or more of that output is already thought to have vanished.

Even though some OPEC countries are pumping extra barrels to make up for the Libyan shortfall, some economists think prices will keep rising. Others doubt OPEC's ability to fill the Libyan gap over the long term.

Julian Jessop, chief international economist at Capital Economics of London, said: "The conflict may lead to the destruction of Libya's oil and natural gas facilities. The upward pressure on the price of oil to date has been capped by the expectation that the disruption to Libyan supply will only short-lived. But this might change if there is more serious damage, accidental or otherwise. Libya only accounts for 2 per cent of the world's oil supply but the strength of global demand means that the market is tight and the prolonged loss of Libyan oil could push prices all the way up to the highs above $140 seen in 2008."

The Libyan war is not the only factor behind oil's rise. Bahrain and Yemen are the others.

Saudi Arabia last week sent troops in Bahrain, a tiny kingdom on the west coast of the Persian Gulf, last week to quell the Shiite protests against the Sunni monarchy. Iran denounced the invasion. If the uprising in Bahrain spreads, it would have the potential to disrupt the oil markets because it lies less than 100 kms from the centre of the Saudi oil industry.

Yemen, meanwhile, seems to be getting more volatile by the day. Yemen's embattled President, Ali Abdullah Saleh, fired his entire cabinet Sunday night after several ministers resigned from his government over his handling of anti-government protests that reportedly left about 100 dead.

Yemen is not an member of OPEC but does have substantial reserves of natural gas, and some oil, and is developing a liquefied natural gas (LNG) industry, with French oil giant Total. Last week Total, the largest foreign investor in Yemen, said oil production had been disrupted by a pipeline blast. Oil exports, however, continued.

In Britain, retail prices for petrol (gasoline) reached a record high and are rising throughout Europe. Britain later this week is to unveil a new budget plan, one that motorists hope will include some tax relief on fuel prices.

With files from Reuters

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