Oil holds near 2-1/2 year high on unrest

By @ibtimes on

Oil prices held near 2-1/2 year highs on Tuesday, with Brent crude topping $121 a barrel as unrest in oil exporting countries in the Middle East and Africa outweighed China's fourth interest rate hike since October.

Diplomatic efforts to end the war in Libya remained stalled as clashes over the oil town of Brega continued while Western air strikes continued to target Libyan leader Muammar Gaddafi's military power.

The stalemate fueled fears of a prolonged loss of oil exports from Libya despite reports that a first cargo of crude oil is due to be loaded by rebels on Tuesday.

Brent crude for May was 1 cent up at $121.07 a barrel at 1253 GMT after closing at $121.06 a barrel on Monday, the highest settlement since August 1, 2008.

U.S. crude was 47 cents lower at $108 a barrel after settling at $107.78 on Monday, the highest since September 22, 2008.

It's looking overbought and we might see a bit of a correction now, but now that Brent has broken above $120 it's hard to put a top on it, said Rob Montefusco, an oil trader at Sucden Financial.

The fourth Chinese interest rate increase since October briefly triggered a decline of around $1 a barrel in oil prices, but markets pared the bulk of losses on reports of election chaos sparking anger in Nigeria on Tuesday.

The market doesn't seem that bothered about Chinese interests rates any more, which seems totally crazy to me, said David Morrison, a strategist at GFT.

TIGHT SUPPLY?

The perception of tight fundamentals has helped trigger price gains on relatively small output interruptions, which have been compounded by the erosion of spare capacity from top exporter Saudi Arabia, analysts said.

Spare capacity is eroding and together with the geopolitical backdrop where Nigerian outages are very much on the cards with the upcoming elections, upward pressure on prices could well continue, said Amrita Sen, an analyst at Barclays Capital.

The kingdom has raised supply and introduced lighter grades of oil to help fill in for missing Libyan output, but traders question how much more room for output increases remains.

Former Saudi oil minister Sheikh Zaki Yamani told Reuters the U.S. would continue to be dependent on exports from Saudi Arabia despite plans to cut oil imports by a third over the next decade announced by U.S. President Barack Obama last week.

He said oil prices could leap to $200 to $300 a barrel if Saudi Arabia is hit by serious political unrest.

Worries about oil supply also focused on Nigeria after elections there were postponed by a week due to logistical problems, sparking fury among voters who were promised a break with a history of flawed and violent polls.

Nigerian militants have previously hit supplies of the country's oil, a sweet crude that has jumped to a premium as a result of the Libyan outages.

We have already lost good grades in Libya, and now the elections in Nigeria are providing further potential upside, Sucden Financial oil trader Montefusco added.

However, production was restarting in Gabon, which produces a similar grade of oil, after energy worker strikes completely cut off the country's near 240,000 bpd of output.

Total and Royal Dutch Shell , key producers in Gabon, both said they were working to restore normal production as soon as possible.

The discount of U.S. crude futures to Brent widened to $13.02 at 1258 GMT, gaining around $2 a barrel since the start of trade this week, but remained distant from a record $17.12 a barrel spread at the start of March.

Weekly industry and government petroleum inventory reports are forecast to show a 1.4 million build in U.S. crude inventories, a 1.9 million barrel decline in gasoline stockpiles and a 200,000 barrel drop in distillates, according to a Reuters poll of analysts.

(Additional reporting by Seng Li Peng and Simon Webb in Singapore; editing by Alison Birrane)

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