Saudi Arabia Tries To Calm Oil Markets

We note that uncertainty regarding potential oil supply disruptions is in a sense higher now than it was during the first and second Gulf Wars. Then, it was pretty much a foregone conclusion that Saddam would be defeated and oil facilities eventually repaired and output restored. Now, markets are unsure how long and how wide potential output disruptions will spread. Will Iran and Saudi Arabia be swept up in the contagion? How long will it take Libya, Egypt, and others to find political stability in the absence of the old leaders? These and other questions are much more open-ended, and are likely to keep a significant risk premium on oil prices for much of 2011. While EM currencies have stage a nice rebound today, oil prices remain elevated and we believe EM remains vulnerable to further bouts of selling. Eventually, EM should decouple but we think that it’s too early to sound the “all clear” signal yet.

By Win Thin

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Not surprisingly, Saudi Arabia said that OPEC stands ready to pump more oil if needed. Saudi official stressed that “There is concern and fear, but there is no shortage.” That may not be entirely true, as there have been press reports that several oil companies have halted production in Libya as staff has been evacuated. Spain’s Repsol and Italy’s Eni said they had shut down production, and comes a day after another European company announced the same. None specified the actual volumes affected. However, Repsol said it shut the El-Sharara oilfield, which is thought to pump about 200k bbl/day and is thus a big chunk of Libya’s total 1.6 mln bbl/day output. There have also been unsubstantiated reports that Qaddafi may have ordered the sabotage of some oil installations, bringing back memories of Saddam Hussein’s sabotage of Kuwaiti (first Gulf War) and Iraqi (second Gulf War) oil facilities.

As we noted yesterday, Saudi Arabia is seen as the swing producer and that it currently has excess capacity of around 3 mln bbl/day, which could cover Libya’s daily output of 1.6 mln bbl. As a whole, OPEC is estimated to have excess capacity of around 5.4 mln bbl/day (5.2 mln ex-Libya). However, much of the added production cannot be accessed immediately and could take several weeks to come online. Clearly, Saudi Arabia dominates OPEC, as the members with the next biggest excess capacity are Nigeria and Angola (each with an estimated 400k bbl/day excess), followed by Kuwait with 350k and UAE with 300k. The other big producer facing substantial unrest is Iran, whose daily output of 3.7 mln bbl would be very, very difficult for OPEC to cover if its production were also to be disrupted.

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We note that uncertainty regarding potential oil supply disruptions is in a sense higher now than it was during the first and second Gulf Wars. Then, it was pretty much a foregone conclusion that Saddam would be defeated and oil facilities eventually repaired and output restored. Now, markets are unsure how long and how wide potential output disruptions will spread. Will Iran and Saudi Arabia be swept up in the contagion? How long will it take Libya, Egypt, and others to find political stability in the absence of the old leaders? These and other questions are much more open-ended, and are likely to keep a significant risk premium on oil prices for much of 2011. While EM currencies have stage a nice rebound today, oil prices remain elevated and we believe EM remains vulnerable to further bouts of selling. Eventually, EM should decouple but we think that it’s too early to sound the “all clear” signal yet.

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