Oil Rises to 29-Month High; Citigroup Sees Brent ‘Fear Premium’

Oil rose to a 29-month high in New York as escalating violence in Libya bolstered concern that supply disruptions may spread through the Middle East.

Crude climbed 1 percent after fighting between Libyan rebels and troops loyal to Muammar Qaddafi intensified. Hedge funds raised purchases of futures to a record for a second week on speculation unrest will cut output further. Citigroup Inc. increased its Brent oil price estimate, saying the threat of more disruptions supports a “fear premium.”

“The focus remains on Libya and on fears of a contagion effect that will impact other oil-exporting countries in the Middle East,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Libya appears to be spiraling into civil war, which will keep prices rising.”

Crude oil for April delivery increased $1.02 to $105.44 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 26, 2008. The contract is up 29 percent from a year ago.

Brent crude oil for April settlement slipped 93 cents, or 0.8 percent, to end the session at $115.04 a barrel on the London-based ICE Futures Europe exchange. The European benchmark traded at a $9.60 premium to Nymex oil, the least since Jan. 31.

The oil market hasn’t priced in a prolonged halt to crude production in Libya and the country may not “produce much oil over the next six months,” Francisco Blanch, New York-based head of global commodities research at Bank of America Merrill Lynch, said today on Bloomberg Radio.

Price Forecast

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.

“We’re facing the biggest supply disruption in a number of years,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The move higher makes sense because this is a very dangerous time. There’s concern that this will spread to Saudi Arabia and a laundry list of other countries in the region.”

‘Day of Rage’

Demonstrations have toppled leaders in Tunisia and Egypt and 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.

Turmoil in the Middle East also pushed fuel prices higher. Regular gasoline at the pump, averaged nationwide, climbed 0.6 cent to $3.509 a gallon yesterday, the highest level since Oct. 5, 2008, the AAA said on its website.

“It’s getting to the point where the price increases aren’t good for the economy,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington. “The consumer-income impact is close to what was reached in the summer of 2008. The higher prices will affect consumer spending and psychology.”

Oil surged to a record $147.27 a barrel on July 11, 2008, before plunging 78 percent in the next five months to a low of $32.40 as the financial crisis unfolded.

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.

$200 Options

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 level since the options started trading in July 2009.

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 in December 2008 from the record high, according to data compiled by Bloomberg. The next retracement level is $120.16.

Oil volume in electronic trading on the Nymex was 793,881 contracts as of 3:22 p.m. in New York. Volume totaled 865,400 contracts on March 4, 8.9 percent above the average of the past three months. Open interest was 1.57 million contracts.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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