Developments this week
Brent futures pushed ahead to close at $115.78 on Wednesday. NY futures dropped $0.64 to close at $104.38 on the news that stockpiles at Cushing, Okla., rose to a record high of 40.3 million barrels last week. As one analyst put it, “WTI has become its own little market, unrelated to what is happening elsewhere.” US crude stocks rose 2.52 million barrels last week, but gasoline and distillate inventories fell for a decrease of 6.3 million in total commercial petroleum inventories.
The fighting in Libya and the possibility that it may spread continues to dominate the oil markets. Fighting in the vicinity of Ras Lanuf, the site of the largest oil refinery, has set an oil storage tank on fire and forced the refinery to stop operations. Observer opinion seems to be hardening around the idea that neither side has the necessary combination of military strength and political fervor to overcome the other so that the situation seems to be settling into a stalemate.
The first Saudi “Day of Rage” is scheduled for tomorrow, Friday, March 11, and the government is taking all possible precautions to control the situation, including the release of 25 Shiites arrested earlier in the week. Saudi Oil Minister al-Naimi said that the country now has 3.5 million barrels of spare capacity down from 4 million last month, implying an increase in production of 500,000 b/d to roughly 9.1 million.
Kuwait, the UAE, and Nigeria are reported to be increasing production by an additional 300,000 b/d which when combined with the increase in Saudi production could result in a total increase of 800,000 b/d. As there have been no official announcements, all these reports are yet to be confirmed. Many veteran observers remain skeptical that a loss of over 1.0–1.3 million b/d can be replaced by increased production that quickly.
IEA officials say the disruptions caused by the Libyan situation have not reached the point where releases from emergency stockpiles are necessary. The member countries of the IEA hold stockpiles equivalent to 3 years of Libyan exports.
With Brent crude trading above $117 a barrel on Monday, concerns are increasing about the impact that high oil prices are having on the global economy. When oil prices spiked to over $140 a barrel in 2008, they were only above $110 for a few months before collapsing to $60 and thereby freeing up billions of dollars for other economic activity. This time the situation is different. Libya’s production outage could continue for an indefinite period. While there are hopes that the increase in Chinese demand will be considerably less in the remainder of the year than in recent months, there is no guarantee that this will happen.
Opinions are mixed as to just what level of oil prices would trigger a major economic slowdown. The split between Brent crude prices and those in NY is adding to the confusion as most Americans are used to thinking of NY futures are the real price of oil. At the CERA conference in Houston this week, Harvard Professor Kenneth Rogoff told the audience not to worry about oil prices hurting the economy until they reach $160 or $180 a barrel; others are not so sure.