Saudi Arabia's ride to the rescue of global oil markets may be hobbled at birth. The kingdom may have plenty of spare production capacity, but its oil isn't as high quality as Libya's. So while Saudi willingness to ramp up output has taken the froth off headline oil prices, a full reversal of the sharp rise this week is contingent on a more settled outlook for Libya.
Saudi Arabia
's
ride to the rescue of global oil markets may be hobbled at birth. The kingdom
may have plenty of spare production capacity, but its oil isn't as high quality
as
Libya
's. So
while Saudi willingness to ramp up output has taken the froth off headline oil
prices, a full reversal of the sharp rise this week is contingent on a more
settled outlook for
Libya
.
On paper,
Saudi Arabia
can
replace lost Libyan supply. Its 3.5 million barrels per day of spare capacity
at the end of January is far more than
Libya
's
daily production of 1.6 million barrels. But
Libya
's oil
is sweeter and less sulphurous than that produced by the Saudis: Refiners
prefer higher grade crude as processing it into gasoline and other products is
less complex. As
Libya
exports the bulk of its oil output, primarily to southern
Europe
,
refiners that can't process heavier Saudi crude will need to find replacement
supplies.
Similar quality crude can be found, notably in
West
Africa
and the
North Sea
. But these areas may struggle
to ramp up production; combined spare capacity in
Angola
and
Nigeria
was
just 450,000 barrels per day at the end of January, according to the IEA. The
relative scarcity of high quality oil is widening the price differential
between higher grade crude and heavier oils: The spread between North Sea Brent
and Russian Urals crude has widened by 36% this week.
Because higher grade crude prices feed into the benchmark Brent futures price,
headline oil prices will likely remain high despite the Saudi willingness to
intervene. Reports of production outages in
Libya
will
also keep markets volatile as the supply situation tightens. Near-term,
refiners can survive by running down inventories, while upgrades in recent
years mean more European refineries can process heavier oils these days. Still,
absent a calmer situation in
Libya
, the
8.7% rise in Brent futures to $111.7 per barrel so far this week will likely
stick.
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