February 24, 2011

Oil Prices Shoot Higher on Libya Turmoil

Crude futures advance as Tripoli cuts output

Worries that the rebellion in Libya would spread to other countries in the Middle East/North Africa (MENA) region, and the drop in output from that nation’s oil exports, caused the price of oil to soar on Thursday. It rose more than 7.5% to its highest since August of 2008. Brent crude April futures also rose, gaining $8.54 per barrel to hit $119.79 before dropping back to approximately $114.00 by 5.35 AM EST.

Reuters reported that, by its calculations, Libya’s normal 1.6 billion-barrel-per-day output has fallen by at least 400,000 barrels due to the unrest. However, Paolo Scaroni, chief executive of energy company ENI, had a much more dire estimate. He told reporters in Rome, "There are 1.2 million barrels [per day] less on the market."

The disruption is causing considerable concern among analysts. Much of Libya’s oil comes from the eastern part of the country, which is no longer under the control of Muammar Ghaddafi, so despite his efforts to maintain his hold on the nation, its most precious resource is not within his grasp.

Goldman Sachs said that severe shortages and perhaps even demand rationing could result if political unrest spreads to other MENA nations. Analyst Jeffrey Currie said in a research note, "The market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of OPEC's spare capacity." And according to Reuters market analyst Wang Tao, Brent crude could hit $158 per barrel in 2011, with U.S. crude possibly going as high as $159.

Fears that Saudi Arabia, the only MENA nation capable of meeting such shortfalls in supply on its own, might follow Libya, Egypt, Bahrain and Tunisia in political unrest that would disrupt its own supply, are prominent. While Saudi Arabia has said it can replace the losses caused by Libya’s problems, if the rebellion contagion spreads there, worldwide problems will result. Saudi King Abdullah has announced $37 billion worth of benefits for Saudi citizens in an effort to head off any protests, but a Facebook campaign is calling for free elections, women’s rights, and the release of prisoners.

Amrita Sen, a Barclays Capital analyst, said in a report on Thursday that it was necessary for OPEC to address market fears on oil supplies if they wished to control the price jump. "Unless we see an explicit move from ... producer countries, i.e., Saudi Arabia, I don't think there is necessarily going to be any downward pressure on [oil] prices."

Figures on the U.S. Energy Administration’s weekly inventory were due to be released later Thursday.

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