The loss is definitely replaceable. Markets have the tenacity to plug this supply gap, yet the contagion fear seems adding to market pressures.
What is the exact quantum of loss?
Earlier last week, Shokri Ghanem, the head of Libya’s state-owned oil company said the country’s output has fallen to 700,000-750,000 bpd as most foreign oil workers have taken flight.
The IEA said Wednesday that between 850,000 and one million barrels a day of Libyan crude is currently shut. However, some other estimates put it even higher. Turmoil in Libya has cut oil output by 75 percent, or 1.2 million barrels per day, Italian oil major ENI said. Spain’s Repsol-YPF oil company announced Tuesday it had suspended operations in Libya only to find out a day later that the oil fields it operates with other firms were still producing 160,000 barrels of crude daily. Still, that was less than half of the 360,000 barrels produced before the crisis began.
Hardest hit by the sudden oil shortage are European refiners that receive 85 percent of Libya’s exports, turning the country’s highly valued crude into diesel and jet fuel. The biggest buyers are Italy, France, Germany and Spain — and Spain is so concerned, that in a desperate bid to cut fuel consumption, it announced reducing the highway speed limits in March.
Steps were needed — and indeed immediately — to fill in this void. Saudi Arabia, virtually the global gas station, stepped in. A cabinet meeting last week reiterated the Saudi commitment to the stability of the oil markets, at the highest level. The Saudi leadership declared, “Saudi Arabia is committed to the stability of the (oil) market” and to ensuring that oil supplies remain available, the Saudi cabinet underlined.
And action was swift.
‘All demands for extra oil have been met,’ Saudi Aramco CEO Khalid Al-Falih told reporters last Monday, without giving exact figures, underlining it was “a moving picture.”
Petroleum Intelligence Weekly citing unnamed industry sources said that the Saudi production including from the Neutral Zone, climbed to 9.38 million bpd in February from 9.08 million bpd in January and 8.62 million bpd in December.
A Reuters survey of oil companies, OPEC officials and analysts, also showed the Kingdom’s output had reached 9 million bpd by the end of the last month. However, Saudi output averaged 8.65 million bpd in February and 8.5 million bpd in January, the survey estimated.
Some other industry sources were also quoted as saying by agencies last week that the Saudi output had risen to more than 9 million barrels per day (bpd).
Action is meeting the Saudi pronouncements. Riyadh has been stressing for some months now that it has a spare capacity of roughly 4 to 4.5 million bpd, and is ready to step in at the time of need. Other Gulf producers, Kuwait, the United Arab Emirates and Qatar are also estimated to hold more than 1 million bpd of spare capacity between them. A source at Kuwait’s National Petroleum Company told Reuter that Kuwait alone held between 600,000 and 700,000 bpd of spare capacity.
This did help sooth some nerves. Adding incremental capacity is not a problem — for now at least — most, including the IEA executive director Nobuo Tanaka, now agree. “Uncertainty makes the market nervous, but there is enough oil,” he said. “The Organization of Petroleum Exporting Countries and Saudi Arabia have enough spare capacity and are ready to produce more.” Also, should the necessity arise, IEA member countries remain ready to release 1.6 billion barrels of strategic oil stocks “at any time,” he comforted the markets.
And indeed one should not miss out that the leading consuming nations of the world, also boast of considerable reserves on hand. That could be used in times of emergency. The industrial world could tap these strategic oil reserves if needed to ward off the risk that Middle East political unrest triggers an inflationary price spiral, the US Treasury Secretary Timothy Geithner said on Thursday.
While playing down risks that oil prices were a threat to a budding economic recovery, Geithner said there was “considerable” spare oil production capacity around the world and “substantial” reserves on hand. “If necessary, those reserves could be mobilized to help mitigate the effect of a severe, sustained supply disruption,” he said.
And despite surging, markets are aware of the fundamentals, of no physical shortage. “The market perception is if there’s an end to the crisis, there won’t be any potential supply shock,” Pearlyn Wong, a Singapore-based investment analyst at Bank Julius Baer Group Ltd., said. “This will reduce the pressure on oil prices because without supply shock, there would be enough inventories to meet current demand.”
Eni Chief Executive Paolo Scaroni also gives the same message. “Certainly the Libyan crisis is playing a role in this sudden surge in prices but this has no bearing on the security of supplies.” He said oil prices would fall below $100 a barrel if the international situation normalized.
Jonathan Barratt of Commodity Broking Services also underlined that there was a fair chance that prices could return to $90 level very quickly given there is a resolution to the Libyan issue. ‘We can certainly say that supply side is no issue,’ he too underlined.
And markets indicated so too. On Thursday Brent oil tumbled more than $3, dragging other commodities lower in its wake, after Venezuela offered a peace plan to end the crisis in Libya. The emerging news had helped calm the markets significantly. Crude fell as much as 1.8 percent, the biggest intraday decline since Feb. 24, as an Arab League official was quoted as saying that the group has consulted with Venezuela on the plan, which involved sending mediators to Tripoli. Libya’s Muammar Qaddafi and Venezuelan President Hugo Chavez had been in discussion on ways to resolve the crisis, it was reported.
But as soon as it appeared that the peace plan could be faltering, crude rose by more than $1. Brent crude futures for April delivery were up $1.14 to $115.93 a barrel, after earlier topping $116.
Speculation is also adding to the fear premium. Scaroni admits, “Naturally there is speculation which is amplifying a real phenomenon.” Tanaka also concedes: “The market is tightening because of economic recovery, but certainly speculation has a role and amplifies volatility.”
With situation in Libya fragile, tense and indeed unclear, and despite the spare cushion available and taps being opened by Riyadh, markets continue to be nervous and edgy. Markets could return to normal levels, if situation in Libya and the region stabilizes. But indeed that remains a big if — one has to concede. And until then the ride could be rough.
