(Aug 27): Oil advanced after Libya’s eastern government said it will halt exports, building on tensions in the Middle East after Israeli strikes on Hezbollah targets in southern Lebanon raised concerns of a broader conflict.

West Texas Intermediate rose 3.5% to settle above US$77 a barrel. Officials in Libya’s eastern government called to halt all oil production and exports as a political tussle over control of the country’s central bank deepened. The eastern government called a “force majeure” that applies to all fields, terminals and oil facilities, authorities said on Monday in a statement on Facebook. 

“These are ‘real’ barrels that could be lost, so that would tighten the physical market for as long as it lasts,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. How long such a disruption could last “is the difficult part to assess.”

The move is the latest in a political struggle over control of the central bank and oil revenues. Libya had already been facing patchy production this month after outages in some of its major fields. Much of the country’s exports are shipped via ports in the east, largely supplying markets in Europe. Libya produced about 1.15 million barrels a day last month.

A drop in exports may temporarily push Brent crude to the mid-US$80s a barrel, Citigroup Inc. analysts including Francesco Martoccia said in a note earlier on Monday.

Oil had already been trading higher on Monday after Israel sent more than 100 warplanes to take out thousands of Hezbollah missile launchers on Sunday, sparking a response from the militant group. Hezbollah, which is backed by Iran and designated a terrorist organization by the US, said it will continue hostilities with Israel until the country agrees to a cease-fire in Gaza. 

Oil in the US is now about 8% higher since the start of the year, supported by geopolitical risks and a likely US interest-rate cut next month. Still, fundamentals have been relatively unperturbed by the flare-up in the Middle East, which provides about a third of the world’s crude. Volatility has remained below a peak at the start of the month, and options skews are still showing a bias toward puts — which profit from lower prices.

Uploaded by Jason Ng