Dubai (Platts)--February 24, 2011 - Saudi Arabia, the world's most influential oil exporting nation, moved to reassure oil consumers Thursday, February 24 it would tap its vast spare capacity to make up for any supply shortfall as Libya descended into anarchy and its oil production plummeted.

Brent crude oil and New York light sweet crude oil futures rose to 30-month highs in early trade even before Eni CEO Paulo Scaroni said Libya's total oil output had slumped by 1.2 million b/d amid violent confrontations between anti-regime protesters and the security forces of a defiant Moammar Qadhafi. The IEA estimated Libyan crude output before the disruption at around 1.58 million b/d.

Front month Brent crude oil shot up to a high of $119.79/b within minutes of the start of the European trading day, a gain of $8.50/b on Wednesday's settle, while New York light sweet oil futures rose to an intra-day high of $103.41/b, up over $5/b, on the Libyan fears.

Official confirmation from Libya of the extent of production outages has been impossible. Estimates from analysts have varied significantly but have been rising in the last two days, with Citi February 24 saying its "best guess" was that some 800,000 b/d was offline.

The International Energy Agency said Thursday that between 500,000 and 750,000 b/d of crude appeared to have been recently removed from the world oil market, although it did not directly cite the deepening turmoil in Libya as the reason for offline production.

The agency, the industrialized world's energy watchdog, said both producing and consuming countries had "tools to deliver adequate oil to the market." It said it was "in close contact with OPEC and major producer countries" and that its members had 1.6 billion barrels of emergency oil stocks at their disposal.

Barclays Capital analysts estimated the volume of shut-in production at about 1 million b/d and rising. Indeed, "to all intents and purposes, for the global market, oil production in Libya is down to nothing, as exports from the country have effectively stopped," they said.

"Under such circumstances, only an explicit statement from the key producers, not outlining their intent to increase production but stating some measure put in place to replace the lost barrels, will calm markets, given the level of fear that grips sentiment currently, despite the Saudi Arabian crude not being an exact match for the lost Libyan production," said Barclays in a report Thursday.

After the meteoric climb, prices eased after a Saudi source said the kingdom, the biggest crude oil exporter and the energy world's unofficial swing producer, would be able to ramp up production of lighter grades to make up for the loss of Libyan high quality light grades to Europe.

"There is no reason for the price to go up," said a Saudi source in response to the price move, referring to assurances made Tuesday, February 22 by Saudi oil minister Ali Naimi that the kingdom had the capacity and is willing to step in and replace any shortage in global oil supply.

"As the minister said...any missing oil will be replaced and we will not allow a shortage to take place in the market," the source said. "Saudi Arabia is willing and capable of replacing all missing oil and by the same quality of oil, Arab Extra Light," he said.

"Saudi oil can flow through the east-west pipeline and then to the Mediterranean to shorten the time," the source said. "Some West African oil which goes to Asia can be redirected to Europe and extra Saudi oil can go to Asia to replace it." Saudi Arabia, with current crude oil output of 8.4 million b/d, has nearly 4 million b/d of spare production capacity that it can bring on line within a relatively short time.

According to the European Commission, Saudi Arabia has already been supplying additional crude to the EU. "The EU imports 10% of its oil from Libya," EC energy spokeswoman Marlene Holzner said in Brussels. "Production has been stopped but the EU is receiving extra supplies from alternative suppliers, such as Saudi Arabia," Holzner told reporters Thursday.

A trading source with one major European refiner said Saudi Arabia was offering additional crude to refiners facing a possible shortage in supply as a result of the turmoil in Libya. "Saudi Arabia is calling the whole world to offer grades...if needed," the source said.

As refiners in the Mediterranean started looking around for possible alternatives to Libyan barrels, Greece's Hellenic Petroleum is considering buying crude from West Africa, a source close to the company said.

A source at Italy's Eni, one of the biggest users of Libyan oil, was doubtful about the prospects of using Saudi crude to replace any missing Libyan barrels, saying that Saudi crude was generally more sour than the Libyan grades his company normally buys.

A source at another Mediterranean refiner said his company might look to Iran as an alternative source to cover its normal supplies of Libya's al-Jurf, a sour crude grade.

Iran, which has been hoarding crude oil on tankers in the Persian Gulf in recent weeks, has shifted some 5 million-6 million barrels of oil into the Mediterranean market in recent days, taking advantage of what traders said appeared to be a "flat price game" in the current market.

A shipping source in Asia said that the National Iranian Oil Company stood to make "a killing" in selling crude it has been holding in storage before prices rose on Libya-related jitters.

Iran's sales from storage -- which shipping sources said last week had ballooned to around 20 million-25 million barrels -- are not necessarily related to uncertainty about export volumes from Libya though it is likely that European refiners, worried by the 75% slump in Libyan oil output, may be in the market for Middle Eastern grades.

Trading sources in Europe confirmed reports of Iranian crude moving into the Mediterranean, with at least one cargo reported to have discharged its cargo at Ain Sukhna, the southern entrance to the Suez Canal that links the Red Sea with the Mediterranean.

Very few countries have the ability to raise output quickly, and Russia, the world's biggest oil producer, seems unable to help. The country's national pipeline operator Transneft told Platts that oil producers had not applied for any increases in crude shipments to western markets.

"We've had no requests [for additional shipments]. Crude deliveries are being carried out as planned," Transneft spokesman Igor Dyomin said.

Russia's two biggest oil producers, Rosneft and Lukoil, confirmed their crude shipments to Europe were in line with previously approved loading programs and export obligations.

Rosneft could consider the possibility of raising exports if the government asked it to, a spokesman said, though it would be at the expense of crude supplies to domestic refineries.

European companies are major producers in Libya, and more details emerged of the ever-changing production climate in the OPEC member country. Austria's OMV said production had been suspended at its only operated field in Libya, the Shateira field, and could not say when production would be restarted.

OMV operates one block in Libya and is a junior partner in a number of other fields in the country with partners Spain's Repsol, France's Total and Libya's National Oil Corporation. The spokesman said that as far as he knew, production at these sites was also "heavily affected." He added that OMV was currently in contact with its partners "to get more details on the impact on the Libyan production." And Repsol said production at blocks where it is active was down to some 160,000 b/d from a normal 360,000 b/d.

But it was Eni CEO Scaroni who gave the first overall number of production outages in Libya. "Naturally there is speculation which is amplifying a real phenomenon. The real phenomenon is there is 1.2 million b/d less on the market, which is not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation," a company spokesman confirmed Scaroni telling reporters in Rome.

Scaroni also said Eni, Libya's biggest foreign producer of oil and gas, has shut in almost 60% of its own Libyan oil and gas production. "In Libya we normally produce 280,000 b/d of oil equivalent with much of this gas," Italy's ANSA news agency cited Scaroni telling reporters in Rome. "At the moment we are at around 120,000 boe/d."

Meanwhile, confusion continued to dominate the market with regard to Libya's oil export ability. Several prompt crude loadings for March have been canceled, although so far there have been no reported declarations of force majeure on crude exports, crude traders said.

One trader said two cargoes of Amna crude due to load in early March had been canceled, while a second trader said loadings of Sarir crude had been suspended. "We were due to load one [Amna cargo] in the next few days but it's not there anymore? -- it seems to have evaporated," said a trading source at a European refiner. "We have another one further out but that one isn't there anymore either," he added.

Exports of other Libyan crudes, including Mellitah and Sharara, have not been disrupted by the escalating crisis in Libya, sources said, although bad weather has delayed loadings. "I think loadings have been canceled more due to bad weather, not because of not enough crude in storage," said one trader.

Meanwhile, ship owners have reported no disruption to crude loadings at Es Sider, Ras Lanuf and El Brega earlier in the week.

A source at the Libyan Emirates Oil Refining Company said the 220,000 b/d refinery at Ras Lanuf on Libya's Mediterranean coast continued to operate despite the unrest. Although he said the refinery itself remained difficult to contact, as email and phone lines are down, the source confirmed that "operations are continuing," at the facility.     

Other sources intending to load product from the location have also confirmed that, for the moment, the message remains business as usual. "I know Ras Lanuf was still delivering product [Wednesday], but it is on a day-to-day basis. One cargo loaded between yesterday and today" a Mediterranean-based source said Thursday. "Anyone with product to lift though is extremely worried," the source said.

The crisis in the Middle East has put immense pressure on crude futures prices, and the EC's Holzner said the EU was concerned about the negative economic impact if prices remain over $100/b for a number of months.

She was echoed by the EC's Economic and Monetary Affairs spokesman Amadeu Altafaj Tardio. "We are concerned about rising oil prices because of what is happening in North Africa. When we look at the inflation figures, we see that inflation has been rising and mainly due to the effects of increasing energy prices. The other components are quite stable, [but there is] no doubt that rising energy prices can have an adverse impact on inflation."

Russia's Prime Minister Vladimir Putin also weighed in to the price debate, saying the rapid spike in oil prices was a "serious threat" to the world economy. --Staff reports, newsdesk@platts.com

- Ends -

For more information:Access this just-released Special Platts.com Feature:  Unrest in the Middle East and North Africa: oil and gas statistics by country at http://bitly.com/dPKtUj.

© Press Release 2011