Libyan fight favors refiners

Sam Fletcher
OGJ Senior Writer

In the last full week of February, front-month crude posted the largest weekly gain in 2 years in the New York market as turmoil in Libya shut in 850,000 b/d of crude production.

After oscillating around $100/bbl during the week, the April contract for benchmark US light, sweet crudes closed at $97.88/bbl Feb. 25 on the New York Mercantile Exchange, up 1% for the day and 9% for the week. In London, the April IPE contract for North Sea Brent crude continued its advance to $112.14/bbl.

“The Libyan crisis currently presents the most serious geopolitical risk to global oil supply in recent memory,” said analysts in the Houston office of Raymond James & Associates Inc. “The oil market is fearful not just of continued Libyan production disruptions but the risk of them spreading to Algeria and, in an ‘Armageddon scenario,’ the Arabian Peninsula.

The Organization of Petroleum Exporting Countries could cope with a total Libyan shutdown, and even a concurrent Algerian shutdown would be difficult but generally manageable, “albeit with much higher prices.” However, Raymond James analysts said, “There is simply no precedent for a Saudi-sized supply disruption, and to say that the oil market would go berserk in such a situation is an understatement. All in all, we wouldn't lose sleep over this extreme-case scenario, but it would seem that $100/bbl WTI (add $10 for Brent) is here to stay, courtesy of the Middle East.”

Refining outlook
Anuj Sharma, research analyst at Pritchard Capital Partners LLC, Houston, said, “Although Saudi Arabia has reiterated its commitment to put more supplies into the market, the challenge is that Libyan production is of sweeter grade than what could be replaced by the Saudi supplies; and the European refineries, which process low-sulfur Libyan crude, would most likely not be able to process higher-sulfur Saudi crude.” If Libyan oil exports are disrupted for an extended period, it could create a severe shortage of sweet crude in the global market.

Paul Sankey at Deutsche Bank Equity Research for North America, cautioned, “Don't make the mistake of thinking that Libya is bad for refining.” Global oil prices are not yet high enough to destroy demand, therefore, “refining trade can keep working, especially if one takes the view that the loss of Libyan barrels will tighten Atlantic Basin product markets,” he said.

Sankey said, “Libya has been a stable, long term, nearby source of light sweet crudes for European refiners, notably the Italians. Replacing those barrels with a somewhat heavier, sourer, and more distant Saudi supply will require more tankers, more time, and yield less transport fuels. That supports a bullish [US] Midcontinent and Gulf Coast refining stance. By contrast this is highly challenging to East Coast and northwest European refiners, using light sweet Brent priced grades.”

Despite increased export petroleum products, US stocks remain at multiyear highs. “There is not enough internal demand for the US refining sector and moving to a model of net exporter of products has not managed to reduce the domestic stock levels,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

On a yield basis, the US is running 2.2 million b/d for distillate exports and 1.1 million b/d for gasoline exports. If US refining focused on domestic rather than international markets, Jakob said, “It could be running with at least 1.1 million b/d less crude oil in its refining system. The US imports 1.1 million b/d of crude from Saudi Arabia.” If US refineries focused on the domestic market instead of exporting products, he said, “The US could cut totally its imports of crude oil from Saudi Arabia and not face any domestic supply shortages. The dependency of the US on oil from the Middle East is therefore much lower than suggested by the crude oil import numbers, given that a large portion of crude oil imported in the US is being processed for the export of products, not for the domestic market.”

(Online Feb. 28, 2011; author’s e-mail: samf@ogjonline.com)

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