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ยป The oil market in the wake of Gaddafi overthrow
Date published: 27/09/2011
The oil market in the wake of Gaddafi overthrow
For some time now I’ve been at pains to clearly identify the inherent supply-side challenges that pose significant longer-term problems for the oil industry.
Why? Because they’re important and real. And typically these supply-side factors are mostly overlooked by the broader market.
Markets tend to focus more on what’s happening with respect to the oil demand side.
Oil markets have generally seen quite robust demand strength. Most of this has come from China, but not surprisingly things have slowed somewhat over recent months.
But week-to-week or even month-to-month variations in oil demand are mostly irrelevant. What’s important of course is the bigger picture – the medium to longer-term trend.
And the bigger picture tells us that oil demand is set to continue growing – and growing strongly.
From a market perspective, the supply side with respect to oil seems to be of lesser importance. In many circles there’s a virtual complacency about future oil supplies.
This is surprising, because it’s getting progressively more difficult and more expensive to both find oil and bring it to market.
The recent market reaction to current political developments in Libya is a prime example of curious and short-sighted market behaviour.
Oil prices fell sharply on the back of news reports of the imminent demise of the Libyan dictator, as markets anticipated a resurgence of Libyan production that had been lost since the political strife began.
Brent crude fell below $US100 a barrel and WTI fell to around $85 a barrel.
Markets were effectively factoring in the imminent resumption of all 1.7 million barrels of lost production of Libya’s premium quality light sweet crude.
Libyan production slumped to a mere 60,000 barrels a day during July, down from 1.7 million barrels a day during January, according to the Paris-based International Energy Agency (IEA).
Of course, news items heralding a return to production and export of Libyan oil were misleading. Since the start of the unrest in Libya last February, OPEC has been bolstering oil output to make up for the shortfall caused by the disruption to Libyan production.
Furthermore, even if there is an orderly transition of power in Libya, it will be some time before oil production and exports are restored.
Cognisant of this fact, oil markets which initially saw a knee-jerk sell-off, have steadied somewhat.
Some of OPEC’s biggest oil producing nations like Libya, Iran and Venezuela have suffered from chronic underinvestment in their respective oil industries for at least a decade now. This situation cannot be reversed overnight.
Shokri Ghanem, the top Libyan oil official who defected to the rebels in June, said it would take 18 months to reach pre-conflict levels. Industry experts at Wood Mackenzie Consultants say it could take three years for Libyan production to return to normal.
The crucial issue is that OPEC has nowhere near the level of spare capacity that it often brags about. Very few OPEC members can actually lift production levels to any significant extent for any sustained period of time.
Just a couple of months ago Western nations hit the panic button by getting the IEA’s agreement to release 60 million barrels of oil from emergency stockpiles for the only the third time in history. This was quite astonishing, given there really wasn’t an emergency need for oil.
This action, in addition to sending crude prices tumbling, demonstrated how desperate Western nations, particularly the US, have become. Even in periods of relatively lacklustre demand, politicians are concerned about supply-side issues that provide support for crude prices.
OPEC has long been a convenient scapegoat for many Western governments, which argue high prices are the root cause of economic ills.
Investors should see the IEA’s actions for what they are – a desperate move that clearly reflects how concerned the world’s major Western oil-consuming nations are about current and future supply issues.
For more information, or to discuss your specific situation, please contact me directly.
Gavin Wendt
Founding Director & Senior Resource Analyst
MineLife Pty Ltd
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