Traders have adopted a new yardstick for oil security, and it's influencing the abrupt climb of oil prices. Call it the Flaming Oil Port Index. It's a notional appreciation of how many more OPEC countries may see fighting, taking their oil production with them. Right now, according to CitiGroup, the index shows that at least 3.3 additional barrels of oil are at risk, or another 3 percent of global demand on top of the 1 million barrels a day gone from Libya's output. With the index that high, oil prices began the morning with another ascent.
Here is how CitiGroup looks at the Middle East (H/T: Izabella Kaminska/FT Alphaville):
This is an invidious gauge. It hardly matters what countries are likely to fall apart. The longer that traders see reports of fighting in the oil ports of Libya, the more real seems the possibility of Algeria and Saudi Arabia seeing destructive violence. It is different from no-room-for-error 2008, when global supply only just met demand and reports of a man with a gun in the Nigerian Delta could send prices soaring. Today, OPEC continues to have at least 2.5 million barrels a day of surplus production capacity above and beyond global demand, depending on how much oil you think Saudi Arabia is producing.
One reason is that trouble in Saudi Arabia's oil-belt no longer is notional. Small Shiite protests broke out last week in the kingdom's Eastern Province, resulting in some two dozen arrests. The Saudis have now entirely banned any type of protest.
Saudi Arabia continues to be the key source of uncertainty that's allowing prices to rise. Quite apart from whether unrest will take hold in the kingdom -- which seems remote at best -- there continues to be a dispute over just how much oil it is producing. Around two weeks ago, the Saudis went around assuring the world that they were capable of compensating for any contemplatable market shortfall, and more quietly made phone calls to key industry officials saying that they in fact already had added production to around 9 million barrels per day.
Here at O&G, we asked for a look under the hood -- did the Saudis really raise oil production in response to Libya, or were they simply taking account of volumes they had surreptitiously added months ago for other reasons? Now, Petroleum Intelligence Weekly estimates that in fact the Saudis went over the 9-million-barrel-per-day mark in January. The kingdom is producing 9.4 million barrels a day as far as PIW can tell.
At the Financial Times, Javier Blas is unhappy about the Saudi mystery as "oil prices race towards $120 a barrel." "The market is flying blind," writes Blas. "Saudi Arabia needs to make clear what its numbers are."
Short of one of Col. Moammar Qaddafi's own men shooting him, look for the fighting to go on for some time. Libya's leader is earning so much money from the high oil prices that he can continue to fund his forces interminably. Watch this report on Al Jazeera: