MARKET WATCH: Brent crude closes above $105/bbl on MENA strife

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 22 -- In London, the April IPE contract for North Sea Brent crude shot past $108/bbl in intraday trading Feb. 21 before closing at $105.74/bbl, up $3.22 for the day because of continued strife in the Middle East and North Africa (MENA), especially in Libya where strongman Moammar Gadhafi vowed to become a "martyr" rather than submit to protestors demanding his ouster.

The New York futures market was closed Feb. 21 for Presidents Day, a US holiday. But benchmark US crude apparently climbed above $91/bbl in unofficial trading, analysts reported.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The global macro situation is a picture where equities (apart from the financial sector) are back close to or above their 2007 peaks, where volatility in equities is minimal, where commodities are back close to or above their 2008 peaks, where input costs are starting to increase and will eat into the profit margins, where inflation is in many countries above target rates, where unemployment is not being solved, and where global unrest has reached historic proportions. For now, the energy focus on the unrest is on the threat to supply operations, but it is also clear that following the unrest some countries will move back a few months if not a few years in terms of economic growth.”

In Houston, analysts at Raymond James & Associates Inc. said, “As Libya is Africa's largest oil producer, the risk of supply disruptions affecting global markets is significantly higher relative to the crisis in Egypt.”

Other countries most at risk for “contagion” of political instability include Algeria, Jordan, Morocco, and Syria. Various protests have been reported in these countries in the past few weeks, with Libya now facing the most acute turmoil, said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

A member of the Organization of Petroleum Exporting Countries, Libya produced 1.6 million b/d of crude oil in 2010 and exported 1.5 million b/d, mostly to Europe. “Industrial sources suggested yesterday that Libya’s oil ports have suspended loading and discharging and that Sarir crude production had been shut down,” Zhang reported. “The situation will most likely have a substantial impact on the market in the short term. The unrest in Libya is also likely to slow down the growth of global oil supply in the medium term as well.”

The average price for OPEC’s basket of 12 reference crudes gained $1.51 to $100.59/bbl on Feb. 21.

Although Libya has the largest proven oil reserve among all African countries, its oil production has been lagging. “Only recently, the National Oil Corp. of Libya had to postpone the timeline for its 3 million b/d production target to 2017. Libya’s oil industry relies heavily on foreign oil companies to develop its oil fields. Currently, many foreign oil companies have already suspended their operations in this country, which will delay Libya’s oil production growth further,” said Zhang.

Over the weekend, Gadhaf’s son and rumored heir apparent warned Libya is on the brink of civil war and $200 billion worth of energy projects are imperiled by the conflict.

At Barclays Capital Commodities Research, analysts reported, “With two long-standing Arab heads of state already swept aside by street protests [in Tunisia and Egypt], the unprecedented wave of popular unrest in the region shows no signs of receding in the near term. Libya’s Moammar Gadhafi appears to be in the most immediate peril, with the eastern town of Benghazi effectively falling into the hands of the demonstrators over the weekend and with several government buildings on fire [Feb. 21] in Tripoli. As a result, market focus is firmly on Libya currently, although unrest in other parts of the MENA region continues.”

However, Barclays Capital analysts pointed out, “While the events in Libya are undoubtedly of prime importance, they do provide a form of red herring for the oil market. We believe the unrest in Bahrain, though not dominating the current news cycle, may be of far greater importance to the strategic balance of power in the Middle East and to the oil market.”

Although not a major oil producer itself, Bahrain’s influence on the oil market reverberates through its importance in Saudi Arabia. “Until the sandstorm [of unrest] that is currently running through the region settles down, the oil markets are likely to remain secondary in importance, irrespective of the level of price that oil trades at,” said Barclays Capital analysts.

The odds for limited producer control over the upside generating a $100/bbl average “is not tenable given the level of spare capacity available in key producing nations,” they said. But recent deterioration in the Saudi-US relationship “may reshuffle those cards slightly.” They said, “The key producers could well be somewhat on the slow side in terms of acting to rein-in the upside, with ultimate control reestablished at higher price levels than $100. Clearly, the perfect storm of fundamental factors together with rising political uprisings creates an environment of upside risk for our price forecasts for 2011 but ever-growing ease with our forecast of $135/bbl (for Brent) for the medium term (2015).”

Zhang said, “Currently the situation inside Libya remains fluid. Furthermore, the risk of contagion for further political instability in the MENA region remains high. This heightens the threat of further price spikes, which poses an increasing risk to the global economy.” He said strategic petroleum reserves in the US and other Western countries should be put on standby to deal with supply losses and higher prices.

“Crude is expected to remain propped-up on increased geopolitical risk and on concerns that the popular unrest in the Middle East could engulf Iran and Saudi Arabia as well,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The autocratic regimes in the Middle East (such as Iran) could even escalate tensions with Israel to divert attention from their domestic turmoil. [We] expect the events in the Middle East to continue to dictate price-direction for the time being.”

In other news, Apache Corp. and Chevron Corp. halted oil and gas production in Western Australia under threat from Cyclone Carlos.

Contact Sam Fletcher at samf@ogjonline.com.

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