Oil Spikes and Stocks Fall as Unrest Intensifies

February 22, 2011
	Phil Weymouth/Bloomberg News

Oil prices continued to surge Tuesday as the political turmoil in Libya sent jitters through global financial markets Tuesday.  Equity markets in both Europe and the United States were sharply lower, while bond prices rose as investors fled risky investments.

Although independent verification of the repression of the rebellion in Libya remains impossible, human rights activists outside the country estimate that hundreds of protesters have been killed by forces loyal to Col. Muammar el-Qaddafi. www.wdalaw.com
“This is looking more like a mini civil war than the protests already seen in countries like Egypt, Tunisia and Bahrain,” the Deutsche Bank analysts Jim Reid and Colin Tan said in a research note. “Libya has the largest oil reserves in Africa and the ninth largest in the world so the political unrest is understandably a source of concern regarding production volumes and prices.”

While investors in the United States have so far ridden out the tumult in the Middle East and North Africa, analysts said they would have a harder time shrugging off the upheaval as it spreads across the region.

A spike in oil prices was particularly worrisome, they said, because it could snuff out the nascent worldwide economic recovery.

“The prospect of a supply-side shock taking oil prices much higher is clearly negative for global growth prospects,” said Tom Levinson, an analyst at ING in London. “It is more troubling that this occurs in a year when policy makers are attempting to secure continued global economic recovery when fiscal austerity measures will bite hard.”

Light, sweet crude oil for April delivery surged to $98.48 a barrel in New York trading, before easing back to $96.43. The April contract for Brent crude, a global benchmark for oil that trades in London, was up 1.6 percent at $107.02 a barrel, a gain of about 45 percent since August, after hitting $108.57 earlier in the session.

In early trading, the Dow Jones industrial average was down 118.70 points, or 0.94 percent. The broader Standard & Poor’s 500-stock index declined 17.75, or 1.32 percent, while the technology heavy Nasdaq lost 51.60, or 1.83 percent.

In Europe, the FTSE-100 and the Euro Stoxx 50, a benchmark for the region, had both shed more than 0.5 1 percent, after similar falls of 1 percent on Monday. The CAC-40 in Paris declined by 1.2 percent.

In Asia, the Nikkei 225 closed 1.8 percent lower, and the Hang Seng in Hong Kong sank 2.1 percent. Markets in the United States were closed Monday for Presidents’ Day, but are expected to open sharply lower on Tuesday.

“Over the past few weeks we had a domino effect, and the concern is that anything can happen,” said Justin Urquhart Stewart, co-founder of Seven Investment Management in London. “At the moment the ripple is very small, but it has the potential to turn into something bigger quickly.”

Other analysts said the unrest had not yet unnerved investors in the United States. Still, the global repercussions of the unrest are becoming hard to overlook.

After the toppling of leaders in Egypt and Tunisia, anti-government demonstrators in Yemen and Libya are seeking to oust their leaders. Witnesses said the streets of Tripoli have been thick with special forces loyal to Colonel Qaddafi as well as mercenaries. Roving the streets in trucks, they have been shooting freely as planes dropped what witnesses described as “small bombs” and helicopters fired on protesters.

Market stability around the world depends to a large extent on the leveling off of the price of oil, which seems unlikely, given the turmoil.

Western countries fear being cut off from the oil supply in Libya, which exports about 1.5 million barrels a day. There appears to be ample reason for concern, as oil companies — including Eni of Italy, the largest energy producer in Libya — have started to evacuate employees.

If the world is, in fact, cut off from Libyan oil, prices are likely to rise even higher.

“The U.S. is not immune from this,” Mr. Urquhart Stewart said. “If you see a significant rise in the oil price for a long period, that could easily choke off any U.S. recovery that is still weak.”

Yet even if Libyan oil exports were shut down, larger oil producers like Saudi Arabia have enough spare capacity to keep prices from skyrocketing.

Seeking to find a solution to price fluctuations, Saudi Arabia scheduled a meeting Tuesday for energy officials from more than 90 countries.

Analysts are watching Saudi Arabia for any signs of dissent there. The country produces about 10 percent of world supply.

“There is no doubt that should Saudi Arabia be drawn in, a major market dislocation would occur,” said Mr. Levinson, at ING.

“There’s reason to get spooked on oil, and U.S. investors aren’t doing it yet,” said Howard Silverblatt, a senior index analyst at Standard & Poor’s. Instead, he said, U.S. investors have been focusing on strong earnings reports and encouraging sales figures from retailers and other major companies in the United States. “We’ve done well, and it looks like that’s going to continue,” he said.

Separately, shares in Spanish banks declined after the central bank in Madrid said Monday that 46 percent of the exposure that the country’s savings banks had to the construction and real estate sectors was “problematic.” Banco Santander lost 1.2 percent and BBVA was down 1.7 percent.

Bond markets in Europe appeared relatively calm. The euro traded at $1.3557 down from $1.3679 late Monday in New York.

Ben Protess in New York and Julia Werdigier in London contributed reporting.