Current Developments
Japan
Businesses idled by the earthquake may reduce Japanese petroleum
consumption for a few days, but may increase use and imports of
petroleum and LNG for several years. Consumption in some areas will see
an upward bump from commuters switch from rail to autos. The rolling
power blackouts have left workers and students uncertain about the
dependability of rail service. Longer term, several nuclear power
plants will never see service again and some of the replacement power
will come from fuel oil. When rescue turns to rebuilding Japanese
energy consumption will rise. Construction is very energy intensive.
Territorial disputes with China over Senkakus and the East China Sea
may increase as the Peoples Republic of China is more than mildly
interested in the oil and natural gas in the disputed territory.
Bahrain
Bahrain has a Shiite majority ruled by a Sunni minority. Its oil is not
important, but its proximity to Saudi Arabia is more than worrisome.
Bahrain asked the Gulf Cooperation Council (GCC) to send troops to help
it The GCC is composed of the Arab states bordering the Persian
(Arab) Gulf. Most GCC members have a Sunni majority. However, a significant percentage
of population in coastal areas of Arab countries adjacent to the Gulf are
Shia. The
Saudis are concerned that there will be unrest in their eastern
province which has a large Shia population. Iran which is predominately
Shia and Persian will encourage the dissidents. These are old conflicts
with a history that extends for centuries and in some cases millennia.
Reports are that the GCC countries are sending troops or riot police
and the first contingent of a 1,000 from Saudi Arabia has already
entered Bahrain.
Libya
Whatever specifics we might give about the situation on the ground
would be out of date in minutes or hours. The opposition has lost
ground and the Arab League has indicated that it would support a a
“humanitarian based” no-fly-zone over Libya. The U.S. wants this to be
led by Europe and this will likely end up in the UN Security Council.
China and Russia will be reluctant to support it. A cessation of oil
from Libya means higher prices and the longer Libyan crude is off
the market the higher the price for Russian crude oil exports. China
will be hurt by higher prices which may be enough to swing it toward
intervention.
All of this brings up images of Rome burning and Nero fiddling. The
opposition is losing its momentum. The west fiddles while Libya burns.
Spare Capacity Down
No other time in over three decades of analyzing oil
prices has the outlook for oil prices been less certain. Most oil price
shocks, including this one, involve a supply interruption from an OPEC
member country. Causes for the interruptions are either war or
civil unrest or both. Given a few minutes, most of us can tick
off a long
list: 1973 Oil Embargo, Iranian Revolution, Iraq-Iran War, Iraq
invasion of Kuwait (Gulf War), PDVSA strike in Venezuela and temporary
ouster of Chavez, 2003 invasion
of Iraq, civil unrest in Nigeria’s Delta region, and of course the
recent revolution in Libya.
The fear of a potential supply interruption can also have a significant
impact on prices as oil consumers and speculators purchase oil futures
contacts. Businesses with costs sensitive to oil prices hedge
against higher prices and speculators hope to profit from higher
prices. It is appropriate and to be expected that there is a supply
risk premium in the price of oil. The size of that premium varies
directly with the probability and size of the potential interruption
and inversely with the volume of spare oil production capacity and the
number of days that petroleum stocks can cover consumption.
Spare oil production capacity in February was down to 4.1 million
barrels per day from 4.6 million b/d a year ago. Depending upon how
much additional oil is put on the market to compensate for Libya that
number should go lower. Almost 80 percent of
that spare capacity is in Saudi Arabia. Anything over 3 million b/d is
normally considered sufficient, as it would be enough to cover a supply
interruption from any country except Saudi Arabia. However, we now have
about 1.4 barrels of Libyan crude off the market and a high degree of
uncertainty about the political stability of many Middle East and North
African exporting nations.
The loss of another MENA exporter would reduce
spare capacity to under two million barrels per day. That was the
level during the oil price run-up from 2003 – 2008. By mid-2008 the
price of oil reached an historic high of $145 per barrel. If Saudi
Arabia with production of 9 million b/d and over 3 million b/d of spare
capacity where to experience internal strife there is no place to go
for more oil and the price would approach and likely surpass $200 per
barrel.
It will be a few months if not longer before we know if there will be
another revolution with a supply interruption in the MENA region.
During that period, we can
expect to experience
a relatively high risk premium. If something else goes wrong and prices
reach $120 for 2-3 months, the U.S. faces the risk of another
recession. In a second recession, oil prices could easily fall below
$60 per barrel.
The earthquake in Japan adds another dimension. In the very short-term
Japanese consumption may be lower, but with damage to their
nuclear power plants Japan will need more fuel oil for power generation
from oil burning plants. There additional consumption of fuel should
put upward pressure on distillate (heating oil and diesel) prices.
The outlook for the next 12 months: Oil prices $120 or $60. As in
2008, both could
happen.
|
|
NYMEX Prices
for March 11, 2011
| NYMEX
Light Sweet Crude |
-1.54
|
$101.16
|
| ICE
Brent |
-1.30
|
$113.84
|
| RBOB Gasoline
NY Harbor |
-0.0319 |
$2.9877
|
| Heating
Oil NY Harbor |
-0.0159
|
$3.0290
|
| NYMEX
Natural Gas |
+0.059
|
$3.889
|
More spare
capacity information at Excess
Capacity.
Crude Oil Spare
Production Capacity
(Million barrels per day) |
February
2011
|
Production |
Capacity |
Spare |
Spare
Capacity
% |
% of
OPEC
Spare
Capacity |
| Algeria |
1.27 |
1.27 |
0.00 |
0.0% |
0.0% |
| Angola |
1.75 |
1.75 |
0.00 |
0.0% |
0.0% |
| Ecuador |
0.46 |
0.46 |
0.00 |
0.0% |
0.0% |
| Iran |
3.70 |
3.70 |
0.00 |
0.0% |
0.0% |
| Iraq |
2.55 |
2.55 |
0.00 |
0.0% |
0.0% |
| Kuwait |
2.30 |
2.62 |
0.32 |
12.2% |
7.8% |
| Libya |
1.34 |
1.34 |
0.00 |
0.0% |
0.0% |
| Nigeria |
2.17 |
2.17 |
0.00 |
0.0% |
0.0% |
| Qatar |
0.85 |
1.00 |
0.15 |
15.0% |
3.6% |
| Saudi Arabia |
9.00 |
12.25 |
3.25 |
26.5% |
78.9% |
| U.A.E. |
2.30 |
2.70 |
0.40 |
14.8% |
9.7% |
| Venezuela |
2.10 |
2.10 |
0.00 |
0.0% |
0.0% |
| OPEC Total |
29.79 |
33.91 |
4.12 |
12.1% |
100.0% |
|
|
|
