03 September 2013, London – The virtual shutdown of Libya’s oil industry has squeezed supply as tightly as when the International Energy Agency, IEA, ordered a rare release of strategic oil reserves during the civil war in 2011.
Brent crude for immediate delivery has surged to its highest in a year and the cost of alternative supplies has jumped, increasing costs for oil refiners and ultimately consumers.
“The loss of Libyan crude oil is a major disruption. The current situation is as bad as in 2011,” said Olivier Jakob of consultant Petromatrix in Zug. “We don’t see how the IEA will be able to stay quiet for long.”
Strikes at ports and pipelines have shrunk Libyan exports to around 100,000 barrels per day (bpd) – less than a tenth of capacity – and taken overall global outages from the Middle East and Africa above 3 million bpd – some 3.5 percent of global demand.
Supply breaks and the threat of U.S. military action against Syria pushed Brent futures above $117 a barrel last week. It traded around $115 on Tuesday even as the prospect of an imminent strike has faded.
That is not far from the $120-mark that in 2011 prompted the White House to go ahead with an IEA-coordinated strategic oil release in response to disruptions caused by the war in Libya – – only the third in the organisation’s history.
As the Paris-based IEA, adviser to industrialized countries and manager of their strategic oil reserves, sees it at the moment, the market is adequately supplied – but it is prepared to respond “in the event of a major supply disruption”.
Shale, Saudis Help
While the sharp drop in Libyan output is similar to that of 2011, there are differences which ease the supply picture and lessen the need for IEA action.
A person familiar with inter-government discussions on the oil market said one view is the outages in Libya and other countries may have simply averted a fourth-quarter oversupply, that might have prompted the Organisation of the Petroleum Exporting Countries to cut its output.
Helping the supply balance, the U.S. shale oil boom is also adding supplies of similar quality to Libya’s light, sweet crude – oil that is easier to refine and low in sulphur.
Then as now, top oil exporter Saudi Arabia – the world’s only producer capable of a significant output boost at short notice – ramped up production to above 10 million bpd, near a record high.
“The Saudis are uncomfortable when the oil price rises above $110 – and they have responded as in the past by hiking output above 10 million,” said Bill Farren-Price, oil analyst and CEO of Petroleum Policy Intelligence.
One difference with 2011, though, may be the length of the Libyan supply shortfall. After being virtually shut down during the 2011 revolution, production recovered rapidly. This time the problems could be protracted.
“It’s a tribal society flushed with weapons and many different groups want their share of the oil wealth,” said Bjarne Schieldrop, analyst at SEB in Oslo. “So logic calls for continued disruption.”
With no end in sight to Libyan unrest, export disruption is making nearby Brent futures ever more expensive and boosting price premiums for alternative crudes such as Azeri Light to near a two-year high.
The premium at which the first-month Brent contract is trading to the second – a structure known as backwardation – has widened to a year-high of almost $2.00 a barrel.
The IEA tapped emergency stocks in June 2011 to help refiners caught without crude to run. It was a move that angered OPEC, which felt the consumer group had overstepped its bounds.
While OPEC collectively did not authorise an increase in output two years ago and is similarly not contemplating action now, Saudi Arabia acted alone. But high Saudi output carries its own risks.
According to Deutsche Bank, a halving of Libyan production next year would reduce Saudi Arabia’s spare capacity to just under 2 million bpd while its total loss would cut unused capacity to under 1.5 million bpd, its lowest since 2005.
“It’s surprising that oil has not gone even higher given all the outages,” Farren-Price said. “Spare capacity is being squeezed once again and there is an increasing burden on secure Gulf oil producers, namely the Saudis, to make up the shortfall.”