Brent Up 1.5% Near $116; Libya Action Stokes MEast Fears

Brent climbed 1.5 percent on Monday towards $116 after western forces launched a military campaign against Libya, stoking fears that violence will intensify in North Africa and the Middle East, source of more than a third of the world's oil. 

Unrest over the weekend also flared in Syria and Yemen in the wake of popular uprisings that toppled long-time leaders in Tunisia and Egypt earlier this year and a crackdown on protests in Bahrain last week.  

U.N.-backed strikes led by the U.S., the U.K. 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. 

In London, Brent crude for May [LCOCV1  115.35    1.42  (+1.25%)] rose as much as $2.29 to $116.22 a barrel and was up 1.5 percent at $115.69, about $4 from last month's 2-1/2-year high near $120. 

U.S. light, sweet crude for April [CLCV1  102.62    1.55  (+1.53%)] advanced $1.79 to $102.86 after western powers launched a second wave of air strikes on Libya early on Monday, dismissing a ceasefire announced by the country's military late on Sunday.

"With involvement from the West, the uncertainty that has surrounded the region and the fear of upheaval and unrest spreading to countries like Saudi Arabia, where we could lose a lot more crude that what we did Libya, is definitely going to be the main price driver," said Matthew Lewis, an analyst at CMC Markets in Sydney. 

President Barack Obama ordered U.S. forces into the biggest military intervention in the Arab world since the 2003 invasion of Iraq, while Libyan leader Muammar Gaddafi vowed to fight to the death.  

"At this stage, it looks like Libya has further to play. Gaddafi still seems very defiant. We'll see further spikes and shocks in the oil market this week," Lewis said. 

Military action on Libyan air defenses over the past two days, sanctioned by the United Nations in a Security Council resolution on Thursday, has crippled Gaddafi's capability to launch airstrikes and detect foreign aircraft, a senior U.S. military official said on Sunday. 

But Gaddafi's control of oil infrastructure in the long term would probably mean reshaping deals with foreign oil companies 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 opening 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 ten members of the Security Council voted in favour. 

The weekend's military intervention hit a diplomatic setback as the Arab League chief condemned the "bombardment of civilians".

The strikes began on Saturday, as a coalition of western nations vowed to prevent Gaddafi from launching attacks on civilians as he seeks to crush a rebellion against his four-decade rule.

MidEast Premium

Crowds set fire to a headquarters of the ruling Baath Party in the Syrian city of Deraa on Sunday, while Yemeni President Ali Abdullah Saleh fired his government after a string of allies broke ranks with him as he faces increasing pressure from street protests to step down.

Saudi Arabia and other countries from the Gulf Cooperation Council (GCC) last week sent troops into Bahrain to help quell Shi'ite protests there against the Sunni monarchy. That angered Iran, which denounced the foreign intervention in the island state that lies less than 100 kilometers from the hub of the Saudi oil industry.    

"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.

Iran's oil minister said on Saturday said any output increase by individual OPEC members aimed at reducing oil price pressures caused by the Libyan crisis would not have the desired effect. 

Some OPEC countries, including Saudi Arabia, have already increased production partly to compensate for the drop in Libyan output and to prevent prices from reaching levels that could derail the global economic recovery. But that has also eroded the group's spare capacity to offset further disruptions.

"None of the OPEC countries have considered it (the current oil price) damaging" to the world economy, Nigerian oil minister Allison-Madueke said on Sunday. 

Oil prices have now recovered completely from a slump triggered by Japan's strongest earthquake on record on March 11. 

Japan hoped power lines restored to its stricken nuclear plant may help solve the world's worst atomic crisis in 25 years, triggered by the earthquake and a tsunami that also left more than 21,000 people dead or missing.

Likely to limit oil's gains was Friday's increase in China's rate reserve requirements as the nation stays focused on stifling inflation, traders and analysts said.