Oil drops to $113 as Opec discusses raising output

08 Mar 2011



In London the FTSE 100 opened up, clawing back yesterday\'s losses after a spike in oil to $118.50 sparked a frantic day across financial markets.



On the Continent shares also rose as the easing crude prices soothed concerns over the impact of high energy costs on the fragile economic recovery.



An official output increase by OPEC would signal the group\'s determination to put a cap on prices and keep the global economic recovery on track.



Oil spiked to two-and-a-half-year high last month after revolutions in Tunisia and Egypt and protests from Morocco to Oman. A brewing civil war in Libya has idled as much two-thirds as of the country\'s oil output, or 1m barrels per day (bpd),



\"We are in consultations about a potential output increase,\" Sheikh Ahmad al-Abdullah al-Sabah told reporters, adding that there was no decision for the group to produce over quotas yet.



Saudi Arabia, the world\'s largest oil exporter and home to most of the spare capacity held by the Organization of the Petroleum Exporting Countries, is pumping about 9m barrels a day, almost 1m bpd above its quota.



US crude closed above $105 on Monday, its highest since September 2008. On Tuesday it was down $1.29 at $104.15.



Gold, which had been driven to $1,440 a ounce at one stage yesterday in a flight to safety, also fell back on Tuesday to $1,428.



\"The massive spike that we\'ve seen in the price of oil has literally been driven by the geopolitical concern. As soon as those short-term speculative motives are removed from the market, I expect to see a sharp drop in crude prices to below $100 and traders to focus on fundamentals again,\" said Matthew Lewis, an analyst at CMC Markets in Sydney.



Fears were intensified as Libya witnessed a day of fierce clashes between forces loyal to Colonel Gaddafi and those trying to topple his dictatorship, while in Saudi Arabia activists renewed calls for a day of protest later this week.



High oil prices pose a threat to fragile economies, including Britain. "Along with fiscal tightening and food prices, oil prices are a real threat to the UK," said Julian Jessop, an economist at Capital Economics.



The consultancy still expects the country to skirt a double-dip recession, but predicts just 1.5pc growth this year and next.



Rising oil cost have put the British Government under pressure to scrap the planned rise in fuel duty and the Chancellor dropped his broadest hint yet that there may be help for drivers in the Budget.



"I am looking, of course, at fuel duty," he said yesterday. "I am seeing what I can do to help."



In the US, the White House is considering tapping the country's strategic oil reserves if prices keep heading north. "We are looking at the options. The issue of the reserves is one we are considering," said William Daly, President Barack Obama's chief of staff.



America last tapped its reserves, which hold about 727m barrels a day, in 2005 in the wake of Hurricane Katrina. Analysts at Deutsche Bank argue that should oil reach $125 a barrel, gasoline prices will hit $4 and cause consumer spending in the US to halve. Gasoline prices are close to a two-year high of $3.81 a gallon, according to the AAA, a US motoring organisation.



A coordinated release of strategic oil stocks by OECD economies is not yet needed because the oil supply disruption caused by an uprising in Libya remains limited on a global scale, the International Energy Agency (IEA) said on Monday


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