Developments this week
This week the oil markets have been dominated by the repercussions of the rapid insurgent advance into Tripoli on Sunday and hopes that a speech by the Federal Reserve Chairman later this week will signal a new round of stimulus for the economy. After a brief sell-off on Monday, sparked by hopes that oil would soon be flowing from Libya, prices climbed on Tuesday as the equity markets rose and the future of Libyan oil production became murkier. There was little change in oil prices on Wednesday with NY oil closing at $85.16 and Brent at $110.15 – about $7 a barrel below where it traded for most of July.
The weekly US stocks report brought another surprise decline of 2.2 million barrels in US commercial crude inventories. Increases in refined products, however, meant that the report had little impact on oil prices. The steady decline in US crude inventories, mainly from lower imports, continues to add support to the IEA’s thesis that global oil consumption is outrunning production at the expense of stockpiles.
Some analysts are noting that the fall in crude prices, particularly on the NY exchange – down about $15 a barrel since the end of July - is not being reflected in a concomitant fall in retail gasoline prices which have only fallen 12 cents a gallon. This is not seen as being sufficient to boost consumer spending in other sectors. The problem of course is that Brent crude is only down about $7 a barrel in the last month and fears of refiners that oil prices are going up again.
A recent analysis of Chinese demand by Platts concludes that its oil consumption in July rebounded to 6.9 percent over last year. Platts notes that the refinery maintenance season in China is over and that if normal seasonal patterns prevail China’s oil demand will be higher in the 4th quarter.
Restarting Libyan production
After a burst of optimism on Monday that Libyan oil exports would be returning soon, a number of analysts are having second thoughts about just how fast and how much oil production can be restored. The first issue is when the security situation will return to normal so that bands of renegade Gadhafi supporters are not running around blowing up pipelines.
A more important question is just which foreign oil companies will be allowed back and under what terms. As the uprising began last spring the Italians, Russians and Chinese were very reluctant to back away from supporting the Gadhafi government, while France, the UK, and the US took the lead in first saving the insurgency from Gadhafi’s overwhelming military power and then supporting the drive on Tripoli with air strikes. Whether this support and lack of same is turned into greater or lesser access to Libyan oil remains to be seen.
Some analysts believe that 300-600,000 b/d of Libya’s oil infrastructure has not been harmed and could be returned to production in a few months – provided there is security and a solid enough government. Other analysts are skeptical and believe that it may take years to work out the various political kinks and get production back to pre-insurgency levels.