Can we get much higher? Oil prices thrive on Libya unrest, overlook US supply situation

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Could it be untrue, could we get much higher? The Door's late front-man Jim Morrison didn't think so when he sang the 1967 hit Light My Fire, but when it comes to the oil market, industry players aren't all singing the same tune.

After an extended holiday weekend in the US, investors returned to their desks on Tuesday with the oil markets ablaze as NYMEX crude oil waged its own war against the ongoing civil unrest that has spread across the Middle East, in particular, Libya where its leader, Moammar Gadhafi, vowed to fight to the death against protesters who want to end his 41-year reign.

NYMEX front-month crude oil traded to its highest level since fall of 2008 at $94.49/barrel Tuesday. But does the upside momentum mean that oil has another shot toward the $100/b level?

Maybe not, said some analysts, who point toward an ever-expanding inventory of crude oil at the NYMEX delivery point at Cushing, Oklahoma.

US crude stocks at Cushing, were at 37.657 million barrels, up 250,000 barrels for the week ending February 11. The total is just 677,000 barrels shy of the all-time high.

"The key is the impact on actual physical oil supply rather than the fear that supply might be disrupted, since with inventories still flush, prices could subside quickly again as long as the oil keeps flowing," said Tim Evans, energy analyst at Citi Futures Perspective.

Currently, foreign oil companies planned to pull workers out of Libya amid the continuing political unrest, including Italy's Eni who suspended oil and gas production Tuesday from a number of sites in Libya as a precautionary measure. Eni is the largest foreign player in Libya in terms of production, with output of about 550,000 b/d of oil equivalent last year, with 270,000 boe/d net to the company.

Ahead of the close of open outcry trading on Tuesday, NYMEX front-month crude was trading nearly flat to Monday's end of trade level of $91.42/b.

Analyst Gene McGillian of Tradition Energy said NYMEX crude's rally, even before news of any oil production disruptions, shows the market's vulnerability to geopolitical news, rather than US government inventory data.

Although a move toward the $100/b level wouldn't be seen as a positive factor for the US economy, McGillian said the recent moves of NYMEX oil show the market's growing awareness that the global oil picture may be tighter than the domestic picture.

At the heart of the protests that have swept across the Middle East are some of the world's largest oil producers and the futures markets in turn, remains uneasy as the violence spreads.

The sparks of civil unrest were ignited in December when a young Tunisian with a degree but unable to find a job set himself alight when the fruit and vegetables he was selling illegally were taken from him by the police. On January 14, Tunisia's disgraced president Zine El Abidine Ben Ali, resigned and fled the country in the Arab world's first such popular revolt. At the time, NYMEX front-month crude oil futures were trading between $90-$92/barrel. Since then futures have dipped to an intra-session low of $83.85/b on February 15, but the have been steadily on the rise on the heels of political unrest in Egypt and fears of disruption to Suez Canal oil.

Economists fear that higher oil prices could slow economic growth as the world recovers from the worst recession in decades.

International Energy Agency Executive Director Nobuo Tanaka said in a news report Tuesday that the IEA has 1.6 billion barrels held in strategic petroleum stocks and would be able to order a release within 24 hours should the need arise.

"There is ample spare capacity. We should not panic," Tanaka said, adding that OPEC members, particularly kingpin Saudi Arabia, were producing "more than they say."

Peter Beutel of Cameron Hanover prompted his readers to "implement the March seasonal buying program immediately." He added that the move carries some risk, especially if events calm down in the Middle East, but that is not a likely scenario.

"The genie is out of the bottle and it is not granting wishes; it is visiting chaos upon the world and we expect it to spread. We want to start buying here and now, and will buy on every dip we get between now and March 15th," said Beutel.

The time to hesitate is through, or is it?

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This entry was written by Alison Ciaccio and was published on February 22, 2011 2:42 PM ET.

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