Oil Rises to 29-Month High; Citigroup Sees `Fear Premium' in Brent Price

Oil rose to the highest in 29 months in New York as escalating violence in Libya renewed concern that supply disruptions may spread through the Middle East.

Crude gained as much as 2.4 percent after fighting between Libyan rebels and troops loyal to Muammar Qaddafi intensified. Hedge funds raised purchases of futures to an all-time high for a second week on speculation cuts will continue. Citigroup Inc. increased its Brent oil price estimate, saying the threat of more output disruptions supports a “fear premium.”

“High oil prices will be sustained over the coming days and weeks because there’s lots of uncertainty about how the situation in the Middle East will develop,” said Sintje Diek, an analyst at HSH Nordbank in Hamburg. “We do not know if riots will spill over to huge oil producers such as Saudi Arabia. There’s no quick solution to this situation.”

Crude for April delivery increased as much as $2.53 to $106.6 a barrel in electronic trading on the New York Mercantile Exchange, the highest price since Sept. 26, 2008. The contract was at $106.50 at 1:41 p.m. London time. Futures on Nymex rose 6.7 percent last week and are up 30 percent from a year ago. Brent crude for April settlement gained as much as $2.53, or 2.2 percent, to $118.50 a barrel on the London-based ICE Futures Europe exchange. The contract jumped 3.4 percent last week, the sixth weekly increase.

Turmoil in the Middle East also pushed oil products prices higher. Gasoline for April delivery gained 4.72 cents, or 1.6 percent, to $3.0936 a gallon on the Nymex after advancing 11 percent last week.

Forecasts Raised

Citigroup raised its Brent price estimate for 2011 to $105 a barrel from $90 and for next year to $100, according to a report by analysts including Mark Fletcher. Commerzbank AG boosted its forecast for Brent in the second quarter to $120 a barrel, citing the risk of Middle East supply disruptions.

Violence in Libya has cut output in the North African country by as much as 1 million barrels a day, according to the International Energy Agency. Libya pumped 1.59 million barrels a day in January, Bloomberg News estimates show.

Hedge funds and other large speculators increased net-long positions amid the turmoil. Wagers on higher prices increased by 27 percent in the seven days ended March 1 to 305,408 futures and options, the most in records dating back to June 2006, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. The total has jumped 65 percent since Feb. 15.

‘Day of Rage’

Options traders are betting more than ever that crude oil is heading to $200 a barrel amid worsening civil unrest in the Middle East. Open interest, or the number of outstanding contracts, for “call” options to buy New York crude for June delivery at $200 a barrel has escalated to the highest since the options started trading in July 2009.

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

“We’re hearing increasing calls for protest in Saudi Arabia, which is the big, great threat hanging over the oil market at the moment,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne.

Oil in New York on March 4 settled above a price observed by technical analysts as a point from which the rally may continue. This level, at $103.39 a barrel, represents the so- called 61.8 percent Fibonacci retracement of the drop to $32.40 in December 2008 from a record high of $147.27 in July that year, according to data compiled by Bloomberg. The next retracement level is $120.16.

“It’s easy for oil today to go up $10 at a time,” said Ken Hasegawa, an energy trading manager at broker Newedge in Tokyo. “Once Brent gets to $120 it could go to $130.”

To contact the reporter on this story: Ayesha Daya at adaya1@bloomberg.net

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

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