If sustained over several months, this may drive up inflation and threaten global economic recovery efforts.

The dominant sentiment in the oil market is the fear that political turmoil would spread to major oil producing countries in the region, with the risk of substantial loss of oil supply. We see the re-appearance of wild oil price predictions, as happened in 2008.
 
How justified is this market fear?

The turmoil has actually caused only little impact on the physical market. As the turmoil in Egypt started, there was a fear that oil trade movements in the Suez Canal and the Sumed pipeline would be impacted, but nothing happened.

The only significant impact is now the roughly 1 million barrels per day (bpd) of Libyan production that is shut in, which is still less than 1.2 percent of world oil production.

However, this production loss was rapidly compensated by key OPEC producers offering incremental crude oil supplies, notably Saudi Arabia. And although the average quality of the lost Libyan crude production (light, sweet) may be hard to replace entirely, thus causing some temporary problems for mainly European refiners, this is all very manageable in the global context.

More importantly, there is a remarkable consensus between IEA and OPEC that 2011 is not similar to 2008. Both organizations agree that 2011 is characterized by a high level of spare capacity, both upstream and downstream, comfortable levels of commercial inventories, an expected slowdown in oil demand growth compared to 2010, and increases in oil supply.

Saudi Arabia alone now still has 3.5 million bpd of spare capacity. In addition, Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi has stated very clearly that he stands ready to compensate for more supply losses if and when they would occur. As the country has done in several instances in the past decades (the two Gulf wars, Iran/Iraq war, Venezuela strike, Katrina hurricane).

Moreover, IEA countries hold 1.6 billion barrels of emergency oil stocks in case of serious supply disruptions.

American President Frank Delano Roosevelt in his inaugural address famously said: "The only thing we have to fear is fear itself." This seems a very appropriate assessment of the current oil market situation.

Does this imply that everything is just fine?

Of course not. In the global oil market, there is a need for more transparency and better oversight to reduce excessive price volatility which helps much needed investment in future capacity expansion.

The Joint Organizations Data Initiative (JODI), coordinated by the International Energy Forum (IEF) is instrumental in providing market players with the best available monthly data on oil demand, supply and stocks at a global level.

Although significant improvements have been achieved, more is needed to improve completeness, quality and timeliness of these data (for instance stock data in emerging economies).

In addition, the new initiative under way at the IEF to build a database on global oil investment (upstream and downstream) will certainly help the market to better understand the medium-term balance between supply and demand.

Regarding the paper oil market, regulators like CFTC, FSA and the EC are currently developing concrete regulation to increase transparency in and oversight of trading in oil derivatives including the still opaque OTC market.

Of course, the paper oil market does play a useful role where it helps airlines e.g. to hedge their fuel price risks.

But where it is used as a channel of massive speculative momentum trading and causing violent over- and undershooting of oil prices, this should be reined in by position limits.

Regulators should also seek ways to expose institutions that make wild price predictions while simultaneously taking market positions. Analysts should be more self-restrained in making panic calls of "spiking" oil prices as self-fulfilling prophecies.

Finally, it is important to ensure that the regulation under way will be internationally coordinated in order to avoid regulatory loopholes.

In reality, the Middle East has been a reliable supplier of oil for many decades and its future share in global oil supply is set to increase. Longer term, it will always be in the interest of the region's governments to sell oil and use the revenues to provide a young and growing population with education, jobs, and higher standards of living.

More broadly, one needs to acknowledge significant differences within the region. Saudi Arabia's global systemic role as the largest oil producing country is now evidenced. Differentiation is needed and punters are taking advantage of markets ill information, lack of differentiation and broad statements that does not provide stability for the global economic recovery.
 
(Courtesy: Reuters)
 
— John Sfakianakis is chief economist at the Banque Saudi Fransi and Noé van Hulst is secretary-general of the Saudi-based International Energy Forum (EIF). This article is written in their personal capacity. The views expressed are their own.