Oil rallies as Canada fire, Libya violence unleash supply fears

By Amanda Cooper

LONDON (Reuters) - A wildfire threatening Canada's oil sands region and escalating tensions in Libya sparked concern among investors over a near-term supply shortage, driving crude oil prices up by 3 percent on Thursday.

Brent crude futures rose $1.58 on the day to $46.20 a barrel by 1355 GMT, while U.S. West Texas Intermediate (WTI) futures rose $1.66 to $45.44.

"The difference today compared with a year ago is the market is starting to price in supply disruptions, whereas in a market that is totally oversupplied, you don't care about losing half a million barrels a day (in production)," Petromatrix strategist Olivier Jakob said.

"The market is becoming much more sensitive to supply disruptions."

The wildfire has forced the evacuation of all 88,000 people in the western Canadian oil city of Fort McMurray and burned down 1,600 structures, and has the potential to destroy much of the town, authorities said.

With evacuees being told to head north towards Alberta's oil sand fields, and some pipelines in the region being shut as a precaution, output at several facilities has been disrupted. The volume of the decline was unclear.

The premium of July Brent futures over July WTI neared its narrowest in six weeks, while the premium of front-month June WTI futures over the July contract fell to its smallest in seven months, driven by the potential for reduced shipments of Canadian crude to U.S. refiners.

"The market seems willing to latch on to any bullish news item generally," BNP Paribas global head of commodity strategy Harry Tchilinguirian said.

"For now, it's fairly unclear as to how long it could take (to restart any affected production) ... you could see affected 1.5 to 1.6 million bpd, in a very worst-case scenario."

Investment firm ETF Securities said unplanned outages within the Organization of the Petroleum Exporting Countries, including Libya, stood above 2 million barrels per day (bpd), the highest in at least five years.

"Investor optimism for oil has markedly improved. We believe the gains in price are sustainable and not just driven by speculative gains. We are likely to be in a global oil supply deficit by Q3 2016," said Nitesh Shah, director of commodity strategy at ETF Securities.

Libya's already crippled oil production is at risk of further disruption from a stand-off between eastern and western political factions, which prevented a Glencore cargo from loading.

U.S. production continues to fall, with the latest official figures showing a decline by over 8 percent since mid-2015 to 8.825 million bpd.

(Additional reporting by Henning Gloystein in SINGAPORE; Editing by Dale Hudson and Susan Thomsa)