Major banks warned on Thursday that an output loss from another oil producer after Libya would lead to global shortages and demand rationing and said OPEC needs to act quickly because the oil rally could derail economic recovery.
Goldman Sachs issued a note saying the world wouldn't be able to cope with another Libya-style oil production outage.
Benchmark West Texas Intermediate crude for April delivery fell 82 cents to settle at $97.28 on the New York Mercantile Exchange. The contract climbed as high as $103.41 per barrel earlier in the day. In London, Brent crude added 11 cents to settle at $111.36 on the ICE Futures exchange.
Italian oil firm ENI, a key Libyan oil player, said the OPEC member had lost three-quarters of its production.
"This makes the risks now associated with further contagion much higher than they were several days ago as further disruptions could now create severe shortages in global oil markets that would require substantial demand rationing," Goldman Sachs analyst Jeffrey Currie said.
Barclays Capital and Citi said it saw no downward pressure on prices until more oil comes to the market.
"Unless we see an explicit move from ... producer countries, i.e. Saudi Arabia, I don't think there is necessarily going to be any downward pressure on (oil) prices," said BarCap analyst Amrita Sen.
Mark Fletcher from Citi agreed that OPEC leader Saudi Arabia needed to take action within weeks. "To date we have had a lot of words from Saudi Arabia ... but they haven't done anything yet and we need to see that action."
Saudi sources said on Thursday that the kingdom, the only nation in the world with large spare capacity, was able to plug any oil supply gap and had the capacity to pump all types of oil, including the light oil produced by Libya.
OPEC is estimated to have spare capacity of 4 million to 6 million barrels per day, while Libya produces 1.6 million. Deutsche Bank said oil above $120 a barrel would be an inflection point for global economic growth.
"It (oil) is certainly edging closer to a level that is viewed by our colleagues as a key threat to global growth," Deutsche said in its morning fixed income research note.
"$120/barrel is the level that oil as a share of global GDP starts to move above 5.5 percent of GDP, which has historically been an environment where global growth has come under pressure."
BNP Paribas said it expected Brent to average $117 a barrel in the second quarter and U.S. crude at $105. It raised annual averages by $13 for U.S. crude to $102 and by $24 for Brent to $112.
"Given the level of uncertainty, the revision is a conservative stab in the dark and marking to market with risks skewed to the upside."
Citi's Fletcher said, however, he was still using a 2011 average price forecast at $90.
"Prices have to move a long way before you get consumers rationing demand, certainly in developed economies. In China and some of the more developing economies, where prices are managed and subsidized, the impact is felt more quickly," he said.
BNP said any output increase by OPEC or release of the International Energy Agency's strategic inventories would take time to reach the market.
The market is driven by fears of popular upheavals spreading to countries such as Algeria or even Saudi Arabia, the bank said.
"When you start adding the potential number of barrels at stake, you can see why the market is tense and would rather be long oil than short," said Harry Tchilinguirian, chief commodity strategies at BNP.
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