Escalating violence in Libya risks widespread disruption to global oil supplies that could send crude prices to record highs above $200, according to analysts.

This despite Saudi Arabia insisting that the current amount of crude available on the global market is "very adequate".

Libya's air force stepped up air strikes and heavy shelling was heard on Tuesday on the front line, as the revolt against Muammer Gaddafi's regime entered its third week amid mounting calls for a no-fly zone over the country.

"As the violence rages in Libya, there are mounting fears that the country's supply disruptions will be prolonged and that other producers in the immediate vicinity will suffer similar outages due to political unrest," analysts at Barclays Capital wrote in a research note this week.

"The foreign companies that have evacuated their employees and halted their operations may be reluctant to restart production if the political and security environment in Libya remains unsettled," they warned.

The International Energy Agency has said that up to two-thirds of Libya's oil production is not making it to market as the country continues to be rocked by the uprising.

The IEA, which represents the interests of industrialised oil-consuming nations, said that up to one million barrels per day (mpd) out of a total of 1.6 mbd of Libyan oil production is shut-in.

Libya is the fourth biggest oil exporter in Africa after Nigeria, Algeria and Angola.

The bulk of its production is exported to Europe, according to the International Energy Agency.

Saudi Oil Minister Ali Naimi has meanwhile downplayed market fears about shortages, saying that his kingdom has extra output capacity of 3.5 million barrels per day.

"Current supplies in the market are very adequate, and there is an extra output capacity that could be used it needed," he was quoted by state news agency SPA as saying on Tuesday.

Naimi said the OPEC kingpin had "developed a special mix of crude oil that resembles the quality of supplies that are in shortage," in a clear allusion to Libya's output -- a light, sweet crude that is highly prized by the market.

"Recent crude prices do not reflect the fundamentals of supply and demand in the oil market as much as they are caused by financial speculation," he added.

World oil prices slid following Naimi's comments, with New York's main contract, light sweet crude for delivery in April, shedding $1.12 to $104.32 a barrel, one day after soaring to $106.95 -- the highest level for 2.5 years.

"Even if circumstances return to normal the medium term legacy effect limits the oil price downside, and if there is another producer interruption or even threat of one, prices will zip past $150 a barrel very rapidly," said David Hufton at brokers PVM.

"A Saudi shock is of course worth a lot more than that."

Nomura bank has forecast that prices could even hit as high as $220 if supply disruptions occur in OPEC member Algeria, which is experiencing social unrest.

Barclays Capital warned that the biggest risk of another major supply disruption could come from Nigeria.

"The fact that the largest oil producer in Africa is poised to hold elections on April 9 has seemingly slipped under the radar. Nigerian elections have been accompanied by considerable violence, particularly in the oil region."

And although the United States, the world's biggest oil consumer, is well-supplied with crude, stocks in Europe were at a six-year low by the end of January, according to the Centre for Global Energy Studies in London.

Barclays Capital concluded: "In oil market terms, this is the year of living dangerously."

channelnewsasia.com