COMMODITIES-Libya, Mid East in focus, seen driving up oil risks

Sun Mar 20, 2011 7:17am GMT
 

 * Western naval, airforces strike at Libya
 * Oil prices seen volatile, higher on Libya MidEast risks
 * For an interactive graphic on Libyan crisis
 * link.reuters.com/neg68r
 * Risk off trades may sap metals, grains
 By Nick Trevethan	
 SINGAPORE, March 20 (Reuters) - UN-sanctioned aerial and
naval attacks on Libyan air defence and ground forces at the
weekend are likely to see oil prices vault higher this week,
overcoming demand-side jitters stemming from Japan's earthquake
and Chinese monetary tightening.	
    French planes fired the first shots in what is the biggest
international military intervention in the Arab world since the
2003 invasion of Iraq, destroying tanks and armoured vehicles in
the region of the rebels' eastern stronghold, Benghazi.
 	
 On Monday, Brent crude , which closed at $113.93 a
barrel on Friday, could target a February peak of $119.79 a
barrel. U.S. crude, which closed at $101.42 a barrel on Friday
may also extend last week's 4.2 percent gain, adding to concerns
about inflation around the world.	
 "The Middle East and North Africa are a powder keg attached
to a slow-burning fuse. The attacks on Libya and naval blockade,
the troubles in Bahrain which are causing tension between Saudi
Arabia and Iran, could cause the whole thing to blow up," said
Jonathan Barratt, managing director of Commodity Broking
Services.	
 "The key is really how Saudi and Iran play out. Cool heads
need to prevail. It's contained at the moment but if things
worsen, you see a Mid East premium very quickly. If they start
exchanging fire, it could easily drive the market above the
record high."	
 	
 	
 CRUDE UP 20 PERCENT IN 2011	
    Simmering tensions in North Africa and the Middle East,
sparked by a revolt in Tunisia in January that spread to other
nations including Egypt, Yemen, Bahrain and Libya have helped
drive up oil prices by around 20 percent so far this year. Brent
crude traded at almost $120 a barrel, its highest since a spike
to just below $150 in mid-2008.	
    So far in March, Brent has risen just 2 percent on
expected lower demand following the Japan earthquake and eased
on Friday after two days of gains, as Libya declared a
ceasefire, easing the threat of further damages to oil
facilities.	
 Oil production in the nation, the world's twelfth biggest
exporter, has fallen dramatically since the unrest started --
down from around 1.6 million barrels per day to around 400,000
barrels. 	
 Oil exports have slowed to a trickle, but they will likely
dry up as military action continues.	
 	
 JAPAN FEARS, CHINA TIGHTENING	
    Weighing on oil and other commodities on Friday was another
increase in China's rate reserve requirements and uncertainty
about near-term demand from Japan as it comes to terms with the
deadly earthquake and tsunami of a little over a week ago that
may have killed thousands and its continuing battle to prevent a
nuclear disaster at a stricken power plant.	
    On Sunday, Saudi Aramco said it expected global oil and gas
demand to rise slightly in the medium term, driven by a rise in
consumption from Japanese industry and regional energy
producers, but is will not have a significant impact on global
markets. 	
 	
 CHINA INFLATION ALSO A FACTOR	
 Out of China, the nation's Vice Premier Li Keqiang said it
will stay focused on stifling inflation even as global economic
uncertainties multiply.  	
 "We will make stabilising the overall level of prices the
primary task of macro-economic adjustment," said Li, who is
likely to succeed Wen Jiabao as premier two years from now.	
 Away from oil, gold markets were also likely to be
well-bid supported by safe haven buying and a potential physical
supply squeeze from Japan.	
 But the geopolitical and economic headwinds developing may
undermine industrial raw materials and grains.	
 The recovery in risk appetite on Friday that sent U.S. grain
futures soaring may reverse. On the week, nearby CBOT corn
futures ended 3.7 percent higher after a 37 cent surge on
Friday to $6.83-1/2 a bushel.	
 Wheat rose 4.0 percent after leaping 12-3/4 cents a
bushel to $7.23. May soybeans rose 27-1/4 cents Friday to
$13.62-1/2. 	
 London Metal Exchange three-month copper shed $55
Friday to close at $9,510 a tonne, but ended the week 3.5
percent firmer. 	
 "There is still a lot of worry in the market about demand in
Japan and China. The Japan story is getting easier to see and we
don't have longer term worries about demand there. China is
causing a bit of disquiet. Inflation-busting policy moves could
depress consumption," said a Singapore based trading source.	
 "The situation in Libya is a non-story as far as the
fundamentals go. It will feed into risk sentiment across a range
of markets and weigh on prices, but it won't last long."	
	
	
 

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