Oil prices rallies as protests in Libya turned towards civil war, causing at least 300 casualties in capital Tripoli alone. International oil companies and sub-contractors are beginning to shut down oil production and evacuate staff and crude output in the largest African producer has dropped -6% immediately. The market worried that the situation will worsen and result in further disruption in oil production. The more-actively traded WTI April contract jumped +7.55% to 96.48. The contract surged to a 2-year high of 98.48 earlier in the day. Expiring today, the March contract jumped +7.83%, to 92.95 after rising to as high as 94.49. The benchmark contract for Brent crude retreated today after soaring +3.14% yesterday. Precious metals also rallied with the benchmark gold contract rising to a 7-week high of 1411.5 earlier in the day. Silver has also strengthened further with the benchmark contract reaching a fresh 31-year high of 34.33 before pulling back.

Anti-government protests continued in the Middle East and North Africa. Indeed, tensions have escalated and worries about contagion to nearby countries elevated. Libya, the 8th largest oil producer among OPEC-11 and holder of the largest oil reserve in Africa, erupted into violence after Muammar Qaddafi's son threatened 'rivers of blood'. Anti-government protesters occupied the second-biggest city, Benghazi. Libya accounts for around 2% of global oil production and news has reported that around 6% of the country's oil production is suspended as foreign oil firms pulled staff out.

While the US market was closed yesterday for the President's Day holiday, the European stock markets tumbled amid the unrest, despite encouraging macroeconomic data. The Eurozone's flash manufacturing PMI climbed +1.7points to 59, the highest level since June 2000, in February while the flash reading for the services sector added +1.3 points to 57.2, the highest level since August 2007, during the month. In Germany, the business confidence index jumped +0.9 points to a record high of 111.2 in February.

Sovereign concerns in the peripheral region remain with spreads on peripheral debts widening modestly. Spain's central bank said the total exposure of Spanish savings banks (Cajas) to real estate and building amounts to 217B euro, of which 100B euro is classed as 'potentially problematic'. The central bank will tell banks on March 10 how much additional capital each of them needs. The focus now has turned to the new stress test. Michel Barnier, the EU Internal Market Commissioner, announced that the methodology for a new round of bank stress tests will be announced on March 2. The test results will then form the basis of recapitalization plans across the 17-nation region. As we know from lessons last year, gold is sensitive and is a major beneficiary to sovereign crisis in the Eurozone. Should the formulation of the stress test and/or the result of the test fail to alleviate market concerns about sovereign and bank risks, gold should rally.