Libya, Irene surprise markets

Energy markets were surprised in late August first by the seemingly sudden collapse of Moammar Gadhafi’s dictatorship after months of impasse and then by the fizzle of Hurricane Irene, billed as possibly the worst storm in 50 years as it churned toward the concentration of government agencies and national media in the US Northeast.

Despite even US President Barack Obama warning East Coast residents to run for higher ground, Irene’s potential “pinwheel of death” turned out to be not much more than a heavy rain envied by Texas and many other drought-stricken states. There was no major damage to refineries, and most petroleum distribution facilities came back online immediately.

“Magellan Midstream Partners still has two facilities in Wilmington, Del., and New Haven, Conn., closed pending further inspection. No updates have been released for the Providence NGL terminal for Enterprise Products Partners, and Kinder Morgan Partners' petroleum terminal in Carteret, NJ, remains closed pending further inspection,” reported analysts in the Houston office of Raymond James & Associates Inc. on Aug. 30. “In summary, it remains business as usual for these partnerships, with procedural inspections to bring these facilities back online.” The price of crude rose 2% Aug. 29 in the New York market on optimism for the economy and oil demand.

While the mayor of New York fretted about a possible storm surge up the city’s East River, the only surge witnessed by Wall Street was in the Standard & Poor’s 500 Index performance, reported Olivier Jakob at Petromatrix in Zug, Switzerland. “Historical volatility in the S&P 500 remains extremely high, and with the current high correlations between crude oil prices and the S&P 500, it is difficult in any day void of significant oil inputs for oil prices to ignore the price swings in equity,” he said.

Libya’s outlook

Reuter news service reported an oil tank on fire at the Es-Sider oil export terminal, Libya's largest, which loaded 450,000 b/d prior to the uprising against Gadhafi. One official was quoted as saying the terminal—controlled by the Waha Oil Co. joint venture under ConocoPhillips, Marathon Oil Corp., and Hess Corp.—was earlier damaged by gunfire. Another damaged tank at the Brega export terminal was smoldering.

Meanwhile, Raymond James officials questioned whether Libyan oil production will be “V, U, or L” shaped. “With the Gadhafi regime finally out of power, we are now going to conservatively model Libyan oil production recovering to near prewar levels over the next 9 months,” they said Aug. 29. “Using Iraq's production recovery after the 2003 war as a case study, albeit with a more conservative bias, we believe Libya could get back to near prewar production levels of 1.4 million b/d by mid-2012.”

However, they said, “If anything, this may be too aggressive since there is still no clarity on 1) the amount of infrastructure damage and 2) the new Libyan government or its fiscal terms. From a longer-term perspective, the fact that Libya has been unable to deliver robust oil production growth following the lifting of UN sanctions in 1999 and US sanctions in 2004 carries read-through for its post-recovery growth prospects. Even more attractive fiscal terms under the new government should not change the fact that Libya is a fundamentally mature oil province.”

Analysts at Barclays Capital Commodities Research concluded, “Even if a regime change does unfold, the prospects for Libyan oil exports this year are not very good, in our view. The Arabian Gulf Oil Co., which is operating the Sarir and Misla fields (200,000 b/d and 50,000-60,000 b/d, respectively), has stated operations could resume within 3 weeks; however, the rebels have been claiming that for some time now. In fact, Agoco maintains that security is simply not good enough for these fields to return to full operation immediately. Thus, the resumption of 250,000-500,000 b/d of production…seems possible by yearend and into the first quarter of 2012.”

(Online Aug. 30, 2011; author’s e-mail: samf@ogjonline.com)

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