Oil Declines Most in a Week on Arab League’s Libya Crisis Resolution Plan

Oil slipped for the first time in three days in New York after Venezuela offered to mediate a resolution to the crisis in Libya, which has cut crude supplies from Africa’s third-biggest producer.

Crude dropped the most in a week after the Arab League said it’s weighing an offer by Venezuela’s Hugo Chavez to intervene in Libya’s civil conflict. Muammar Qaddafi’s warplanes bombed rebels yesterday as his troops fought unsuccessfully for a major oil port, and opposition leaders appealed for foreign nations to launch air strikes. Prices may be starting to hurt global economic growth, said Adam Sieminski, chief energy economist at Deutsche Bank AG.

“Things still look grim in Libya, with all the signs of a prolonged conflict that will severely hamper oil and gas exports,” said Christopher Bellew, senior broker with Bache Commodities Ltd. in London.

Crude for April delivery slid as much as $1.86, the biggest decline since Feb. 24, to $100.37 a barrel in electronic trading on the New York Mercantile Exchange and was at $101.19 at 1:34 p.m. in London. Yesterday it settled yesterday at $102.23, the highest since Sept. 26, 2008.

Brent crude for April settlement fell as much as $3.26, or 2.8 percent, to $113.09 a barrel on the London-based ICE Futures Europe exchange, the biggest decline since Nov. 12.

Arab League

The Arab League is holding discussions with Venezuela on sending mediators to the North African country, said Hesham Youssef, chief of staff for the group’s secretary general, Amre Moussa. Venezuela is also discussing the plan with other countries, he said in a phone interview today.

Oil surged yesterday on concern the turmoil curbing Libya’s exports will spread to the Middle East and disrupt more supplies. Violence has cut Libyan oil output by as much as 1 million barrels a day, the International Energy Agency said.

“The market perception is if there’s an end to the crisis, there won’t be any potential supply shock,” Pearlyn Wong, a Singapore-based investment analyst at Bank Julius Baer Group Ltd., said in a telephone interview in Singapore today. “This will reduce the pressure on oil prices because without supply shock, there would be enough inventory to meet current demand.”

Demonstrations have toppled leaders in Tunisia and Egypt, while there have been protests in countries including Iraq, Iran, Yemen, Oman and Saudi Arabia, the Organization of Petroleum Exporting Countries’ biggest oil producer. Websites have called for a nationwide Saudi “Day of Rage” on March 11 and March 20, according to Human Rights Watch.

Prolonged Diminished Capacity

Libyan oil production may not return to recent levels if Qaddafi is overthrown, following a trend set by fellow OPEC members Iran and Venezuela when their own governments last changed, according to a Baker Institute analyst.

“You could see, in the case of Qaddafi being overthrown, particularly if it’s violent, prolonged diminished capacity from Libya,” said Ken Medlock, an energy fellow at the James A. Baker III Institute for Public Policy at Rice University in Houston, in a telephone interview. “Regime change, even if it’s good for democratic movements, it’s generally not good for technical industries.”

Oil also declined amid signs the market is “overbought,” prompting investors to sell contracts. The front-month contract’s 14-day relative strength index yesterday rose to 74.67, the highest since June 2009, and is above 71 today, according to data compiled by Bloomberg. A reading of 70 typically indicates a price is set to retreat, while 30 suggests it may recover.

“These high prices are beginning to weigh on the minds of central bankers who are worried about what it might be doing to inflation,” Deutsche Bank’s Sieminski said in an interview with Phillip Yin on Bloomberg Television. “As oil gets up to $120 a barrel it begins to impinge on global economic activity.”

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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