Aug 25 2011
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Even as hopes arise of a quick resumption of Libyan oil, a whole host of new supply-side worries will ensure that crude production remains tight.
The resumption of Libyan oil will not dent oil prices as supply constraints continue to add up.
While the world searches for Moamer Gaddafi, oil traders are already factoring in the return of Libyan oil supplies to the market. Goldman Sachs expects Libyan oil production to come on line sooner than earlier estimated given the rapid progress made by Libyan rebels in taking over key strategic spots, including oil fields and export facilities.
Goldman says Libyan oil production could quickly be ramped up to 585,000 barrels per day, more than double the previous estimate of 250,000 barrels.
"Any increase in supply over the coming weeks is limited to our production forecast and bound to the eastern production that has been long under opposition control," Goldman analysts said in a report. "It will be challenging to bring the shut-in production back online. Even should political and security conditions allow it, Libyan oil exports would likely be limited to at most 600,000 barrels a day in the short to medium term."
Barclays Capital, which expects Brent to remain above $115 a barrel in the fourth quarter, disagrees. "We do not expect a swift return of Libyan volumes into the market and even if prices soften in the short term, they are likely to rebound on later realisation of this fact. Indeed, Arabian Gulf Oil Company (AGOCO) stated yesterday that there is no timeframe for Libyan oil output to resume, and it could very well take months. It also added that about 700 Libyan oil wells need workovers once security is restored."
Forgotten in the euphoria of Libyan oil returning to the market is the disruption in Nigerian oil. Royal Dutch Shell was forced to declare force majeure on its Nigerian Bonny Light crude exports from Nigeria to repair pipeline damage caused by a recent spate of hacksaw attacks. The force majeure was declared on Shell's Bonny Light exports until October, just six weeks after its export was normalised following a recent repair work to the pipeline damage caused by a similar attack in June.
This is not the extent of supply-side woes. Non-Opec suppliers have been hit by a series of catastrophes. The North Sea output has been poor, there are technical problems in Russia and China and Yemen's oil production has stalled due to continued unrest in the country.
"As recently as May, the IEA were projecting growth in non-OPEC oil this year of 750,000 bpd, but that has been slashed to just 400,000 bpd in its latest report," says BarCap.
A large part of the problem is that in many non-OPEC areas oil reserves are ageing and require high levels of investment and maintenance just to sustain output at current levels.
"These issues will not be resolved overnight, and we would not rule out further significant downgrades to consensus views of non-OPEC supply in Q3 and Q4,: says BarCap.
Littlte Wiggle Room
More worryingly for oil producers, prices are at levels at which the global economy cannot cope.
"Oil prices have once again become an economic liability, but it is not clear how much room there is for them to fall, given the rising demands of oil?producing nations," says Centre for Global Energy Studies (CGES) in its report.
"Attempts to avert the spread of popular unrest that has swept neighbouring countries have led oil-producing countries to pour billions of additional dollars into social spending, raising the oil price that they need to cover this expenditure. The OPEC Basket price needed by Saudi Arabia to cover its planned expenditure in 2011 is calculated by the CGES to be around $90/bbl; other OPEC member?countries need even higher prices."
In 2008, when Opec prices averaged $94 per barrel, Saudi Arabia's breakeven price was $59 barrel - now it stands at $90, according to CGES estimates.
"The revenue needs of OPEC producers are now pushing oil costs to levels that the global economy cannot tolerate. Either producers need to reduce their break-even prices, or consumers need to move rapidly to curtail their oil use. The alternative is a global economy that will continue to lurch from crisis to crisis," says CGES.
Further supply risks will keep oil prices relatively high for sometime, even if there are intermittent price reliefs. The market has already lost about 1.7mb/d of Libyan crude, and it is unknown whether the Arab Spring will leave the region more democratic, stable and prosperous.
"The risk of further supply outages remains high, especially in Iraq where rising violence and the impending withdrawal of US troops is imperilling recent security gains."
All combined, Opec's spare capacity stands at 3% of global demand, which leaves little room for oil traders to be pessimistic about crude prices at a time when lethargic global economies are pointing towards a slowdown in crude demand.
No wonder Opec is keen to stay put and not cut production despite statistics showing curtailed oil demand. They are in the oil price sweetspot of $90-100 a barrel.
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