MENA strife lifts crude to 2-year high

Sam Fletcher
OGJ Senior Writer

Fighting in Libya and general unrest in the Middle East and North Africa sent the price of crude above $102/bbl Mar. 2 in the New York market—“the first time in more than 2 years” the front-month contract closed above $100/bbl, said analysts in the Houston office of Raymond James & Associates Inc. Oil prices pulled back slightly Mar. 3 after New York crude made an unsuccessful run at $103/bbl. However, it surpassed 104/bbl Mar. 4.

Extended conflict in Libya with “commensurately lengthy disruption to oil supply” looks likely, said Raymond James analysts. At Standard New York Securities Inc., the Standard Bank Group, James Zhang said, “If oil prices rise much further, this would pose downside risks to the global economy. Our concerns are based both on the current level of oil prices and the speed with which oil prices rise.”

Zhang added, “We view oil at around $130/bbl as a potential inflection point for the global economy. Currently, the global macroeconomy remains supportive of the oil market, in conjunction with strong fund money inflows into the market. However, we expect some demand destruction to be caused by the currently high oil prices.”

$120 crude
On the other hand, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Most policy makers in the US [and] quite a few macro asset managers do not fully realize that the price of oil in the US is at $120/bbl and not at $102/bbl. WTI prices in 2011 cannot be compared to WTI prices in 2008 due to the increase in the spread between WTI and the US Gulf Coast crude oil values.”

This year, he said, “WTI has moved to an unusual discount to the rest of the US crude oil markets, and the real price of crude oil in the US, on the basis of Light Louisiana Sweet on the US Gulf Coast, is already close to or above $120/bbl. The fact that WTI is at a deep discount to US Gulf Coast crude oil might not send the average American consumer in panic mode on a news headline basis, but the price of gasoline he buys to fill his car is based on $120/bbl crude oil, not $102/bbl. Based on current prices, we estimate that the average retail US gasoline prices should [soon] be close to $3.60/gal.”

Recent data from the Energy Information Administration “imply that 2009 finding costs support an oil price range near $55-75/bbl,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington. However, he explained, “Correcting for rising costs in 2010-12 and strong gas reserves in the ‘barrels of oil equivalent’ figure, we still believe that a range of $75-100/bbl for oil is cost justified. If one adds geopolitical risk into the mix, current prices cannot be considered extreme, in our view.”

Refining margins
Sieminski said, “The divergence of US benchmark WTI from the world's other crude oil benchmarks has played havoc with refining margins. US Gulf Coast WTI margins have benefited sharply from the benchmark's weakness, while refiners in Europe running Brent have suffered. In Asia, margins have generally held up as strong gains in middle distillates offset weakness in naphtha and gasoline.”

Jakob said, “In Europe, the [area] most affected by the loss of Libya crude oil, cash crude oil differentials are globally weakening, and the front Brent futures have moved back to oscillating between a flat and a small contango structure. The loss of Libya crude oil supply is being compensated by a loss of crude oil demand as refineries reduce runs either for planned maintenance or for economical reasons for a lack of processing margins.”

He added, “Demand destruction is not an overnight but a lengthy process. Those nations that are subsidizing domestic oil prices will have to run greater budget deficits (Thailand is starting to run out of cash for its oil fund), which then turns into lower ratings, lower gross domestic product growth, etc.”

(Online Mar. 7, 2011; author’s e-mail: samf@ogjonline.com)

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