Nomura: Middle East crisis could drive oil to $220 a barrel

Nomura says a worsening of the current turmoil in Libya could spark off a chain of events that could see oil peak at $220 in a worst case scenario, although it says even this may be 'conservative'.

In a note from its Asian oil and gas analyst team, Nomura said the closest comparison to the current wave of unrest rocking North Africa would be the 1990-91 Gulf War which saw oil prices surge by 21%.

Up to yesterday, oil prices had surged 13% since the latest bout of unrest  began in Tunisia last month, while today, oil prices have risen a further 4% with US Brent crude futures for April reaching $116.9 per barrel, and briefly touching $119 in frenzied early morning trading on Thursday. This is oil's highest level since the height of the global credit crunch two and a half years ago.

That level sees oil approaching the breaking point that could trigger a global slide back into recession according to a number of analysts.

This time, Nomura bases its worst case estimate for a jump to $220 on a number of worst case scenarios. First, on the assumption that Algeria, as well as Libya, will shut down all oil production.

That would create a situation where Opec spare capacity would come down to around 2.1 million barrels a day - a level similar to reduced capacity at the time of the Gulf War and in 2008, when oil hit a peak of $147 per barrel.

The note said: 'We identified three distinct stages of oil prices during the 1990-91 Gulf War. During the initial stage of the Gulf War, prices increase by 21%. This compares with recent days when oil prices rose by 13% since the beginning of the MENA unrest.

'If there is evidence of real supply disruption, we could move into Stage 2 during this stage of the Gulf war, prices moved to its peak (up 130%) within a period of two months. Assuming that prices could move up by the same amount, we could see US$220 per barrel, should both Libya and Algeria halt their oil production. This could be conservative as speculative activities were absent then.'

Nomura stresses that this is a worst case scenario, but it does not factor in any disruption to the giant Saudi and Gulf State oil fields. Some commodity experts already believe the  fear of contagion to Saudi is driving oil prices higher.

One Wall Street Journal blogger, Dave Kansas, described the comparison to the Gulf War predicament as 'a little fraught.'