Developments this week
NY oil futures touched $100 on Wednesday as the situation in Libya deteriorated further and violence in Tripoli increased. In London, Brent crude touched $111.85 a barrel and in NY gasoline futures climbed nearly 11 cents a gallon on Wednesday. With Libyan leader Gadhafi saying he will fight to the death — either his or the protestors, the country has entered what could be a prolonged civil war. Foreign oil workers are making their way out of the turmoil as quickly as they can. A large share of Libya’s 1.6 million b/d of oil production has already been shut-in and it seems likely that much of the rest will follow shortly. To make matters worse, there are reports that Gadhafi has ordered oil facilities destroyed to teach his opponents the consequences of defying him. If he does manage to hold on for a while and succeeds in doing significant damage to the country’s oil facilities, Libya’s production halt could be a longed one.
Attention is now turning to the possibility that the unrest which started in Tunisia could spread further with Algeria, Iran and even Saudi Arabia seen as prime targets. Each of these countries has large numbers of under-employed youths who have been newly energized by digital communications and examples that stagnant despotic governments can be overthrown. The Saudis seem to be getting the message for upon his return home the King announced a new program of $37 billion in grants to aid the kingdom’s poor, unemployed youth. There are reports that the periodic demonstrations in Iran, which so far have been suppressed by security forces, are turning more violent.
The immediate concern, however, is finding a replacement for the lost Libyan production. The IEA, OPEC, and the Saudi Oil Minister al-Naimi all assured the world that that the OECD has 1.3 billion barrels in its stockpiles and that the Saudis are ready to increase production as soon as they perceive shortages starting. The IEA is holding a board meeting this week to discuss the release of oil from stockpiles.
Although Saudi Oil Minister al-Naimi once again mentioned the 4 million b/d of spare capacity that he has in reserve, many commentators are skeptical. They note that the grades of crude that the Saudis might bring to market are lower than the lost Libyan production and may not be compatible with European refineries. Shipping oil from Libya to Europe is quick, but cranking up new Gulf production and getting it to Europe will take considerably longer. Other observers, looking at the history of Saudi production in recent years, doubt that a sustained increase of millions of barrels per day for the country’s aging oil fields is achievable or advisable.
Elsewhere, Beijing raised retail gasoline and diesel prices once again. Interestingly, this move is expected to increase China’s demand for crude as it makes refining more profitable in the face of rising crude prices. In the US the weekly stocks report was delayed until Thursday, but is expected to show yet another increase in US crude inventories.
Speculation about the future of the Middle East is rampant. Some are talking of $220 oil if Algeria goes under. Others note that if Gadhafi with $12,000 of GDP per capita couldn’t bribe his people into acquiescence, why should the Saudis with only $14,000 of GDP per capita be able to do so.