Isra-Mart srl:Oil surges nears $120 a barrel on Libya and Middle East fears

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Oil prices soared to almost $120 a barrel on Thursday amid fears that the unrest in Libya and Bahrain could spread to other oil-rich countries in the Middle East, including Saudi Arabia.

Brent crude leapt $8.54 to $119.79 a barrel, the highest price since August 2008. It closed at $112.20 on Wednesday, up 5.4 per cent on the day. Oil prices have gained 15 per cent in the past four days as the revolt in Libya cut more than a quarter of the country's output. US crude for April delivery rallied to $103.41, the highest since September 2009.

Stock markets around the world tumbled again, with the FTSE 100 index in London down more than 20 points at 5901.16. The Dax in Frankfurt dropped about 80 points and the CAC in Paris fell nearly 30 points. Overnight, the Nikkei in Tokyo closed down 1.2 per cent.

Markets worry that the unrest could spread to Saudi Arabia, which pumps a tenth of the world's oil and is the only country with significant spare capacity that could be used to plug supply shortages.

Analysts at Goldman Sachs said further disruptions could create "severe" oil shortages that would require "substantial demand rationing". "The market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of Opec's spare capacity," said commodity analyst Jeffrey Currie.

"Although we still see contagion to the large energy producers in the Gulf as relatively low, the stakes associated with further contagion are now much higher, which creates even further upside risk to our price forecasts."

The cost of oil hit an all-time high of $147.02 in July 2008, but then fell back as the recession in most western countries reduced demand for crude. Commodity analysts at Japanese bank Nomura have warned that prices could perhaps hit $220 a barrel if the crisis in the Middle East continues. They compared the current situation to the 1990-1991 Gulf war, saying if Libya and Algeria were to halt oil production, prices could peak above $220 a barrel. Others have predicted that oil could rise above $150 a barrel if the turmoil spreads.

The International Energy Agency warned this week that surging oil prices could derail the world economic recovery. Economists reckon that a $10 a barrel increase in the price of oil knocks about half a percentage point from global GDP growth, although some still expect oil prices to drop back later this year.

Gold prices hovered near a seven-week high as the surge in oil prices triggered inflation fears. Spot gold traded at $1,415.45 an ounce. "People don't have much confidence that the Libya crisis will be settled any time soon, so a lot of them are betting on gold," a dealer in Singapore told Reuters. "Gold will be king."