Singapore: Brent crude rose above $112 a barrel on Tuesday as continued unrest in the Middle East and North Africa threatened to further reduce crude supplies even as Saudi Arabia ramped up output to cover Libyan exports.
Gains were capped as manufacturing growth in No. 2 oil importer China slowed in February to a six-month low. In top consumer the US, crude oil inventories likely increased for the seventh consecutive week last week on higher imports.
Brent futures for April rose 55 cents to $112.35 a barrel by 11:10am. The contract gained over 10% in February, its biggest monthly percentage rise since May 2009. US crude rose 45 cents to $97.42 a barrel.
Both benchmarks surged to their highest in 2-1/2 years last week as the revolt in Libya cut supply and spurred fears that tensions could spread to other oil producers in the Middle East and North Africa.
Demonstrators blocked roads into Oman’s main oil product port on Monday, although exports were unaffected.
“We need to pay attention to the situation in Libya,” said Yuichiro Sakaki, a Tokyo-based trader at Mizuho Securities. “It may be a risk factor if (the outages) continue for a long time.”
Crude oil shipments from Libya are at a virtual standstill as reduced production and bad weather hamper exports from the world’s 12th-largest producer, shipping sources said.
Bank of America Merrill Lynch said Libya’s oil infrastructure on the eastern side of the country could be prone to attacks, “creating the risk of a prolonged output loss.”
The bank added that the oil market’s ability to deal with further unrest in the Middle East was limited. Still, a Saudi source said on Monday that the kingdom has another 3.5 million barrels per day (bpd) of spare capacity, even after it raised output to around 9 million bpd to meet plug the gap left by Libya.
Libya produces 1.6 million barrels per day of mainly light sweet crude and Saudi Arabia has said all demand for extra oil from Libyan customers have been met.
“Saudi Arabia appears to be cranking up supplies to fill the gap, but it is unclear at this point whether it will fully offset the supply loss,” JPMorgan analysts led by Lawrence Eagles said in a 28 February note.
CHINA MANUFACTURING SLOWS
Chinese manufacturing growth slowed in February to a six-month low, according to an official survey, as the government’s sustained campaign to tame inflation weighed on industrial activity.
Although China’s economic growth is expected to slow slightly this year, the world’s second largest oil consumer still has strong demand for crude and products to feed its expansion, Mizuho’s Sakaki said.
China is targeting 7% per year annual economic growth from 2011-2015, down from the average growth of 11.2% in the last five year period.
Oil price spikes could cause dislocations to the world economy, JPMorgan analysts warned.
“A steep rise in oil prices that is caused by a supply loss is likely to be more damaging than one that is driven by robust demand,” the bank said.
Separately, the IMF warned extended higher oil prices would hit world growth.
In the US, crude stocks are expected to rise 1.2 million barrels last week while inventories for oil products are likely to fall, a preliminary Reuters poll showed.
“While further escalation of tensions could trigger renewed price spikes, we think oil is expensive from a fundamental perspective,” Credit Suisse analysts said in a March 1 note.
“Hence, we expect oil prices to pull back to pre-turmoil levels once geopolitical risks subside.”