Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

The Libyan Crisis: Where Are Crude Oil Prices Going?

Commodities / Crude Oil Mar 03, 2011 - 01:47 AM GMT

By: Marin_Katusa

Commodities

Best Financial Markets Analysis ArticleMarin Katusa, Casey’s Energy Report writes: The oil picture is always complex, but right now things are about as complicated as they can get.

The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections.


Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change.

Yemen and Bahrain are unsettled, to say the least.

And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria - with Libya inching closer and closer to full revolution status - matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.7 million barrels a day. Libya is Africa's third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya's oil supply has been disrupted (one report pegged it at 6%). But Libya's second largest city, Benghazi, has fallen to protestors, and it is in the country's east, where the oil fields lie.

With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country's next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.

The price of oil responded to Libya's instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. "That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable."

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted.

Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now - they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up - speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks - Brent and WTI - is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe's North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world's oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn't yet passed US$92. When you add in the fact that no one really knows what's going on in the world's fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya's potential revolution poses a real threat to oil supplies - as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see their day in the sun. In the upcoming issue of Casey’s Energy Report, Marin and his team introduce a new standard to – for the first time ever – compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you. Learn more about the future of geothermal and how to profit in this free report.]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules