European refiners dependent on Libyan crude must have breathed a sigh of relief when the regime of Col. Moammar Gadhafi suddenly fell and the rebels who ousted him quickly set about restoring lost oil production.
European refiners dependent on Libyan crude must have breathed a sigh of
relief when the regime of Col. Moammar Gadhafi suddenly fell and the rebels who
ousted him quickly set about restoring lost oil production.
However, comments from the head of OPEC Monday indicate that the end of
hostilities may not lead to the long hoped-for boost to world oil supply,
because other members of the exporters' group are likely to cut their own
production as
Libya
's
rises.
So the tight oil market that has persisted through the long spring and summer
of
Libya
's
civil war will not necessarily abate as normality is restored. Certainly, it
looks highly unlikely that the oil market will move back into the kind of
supply surplus that could put a serious dent in price.
OPEC Secretary General Abdalla Salem el-Badri, a Libyan, told a forum in
Dubai
that,
"when
Libya
will
come to production, [Gulf] OPEC members will reduce their production...no doubt
about it."
The country could be back at pre-war production levels of around 1.5 million
barrels a day within 15 months, he said. "As long as
Libya
starts to produce more and more, I'm sure [OPEC] member countries will cut. It
is in their benefits."
This is not what consumers paying high prices for gasoline and diesel, and
politicians hoping that lower oil prices will stimulate ailing economies, want
to hear. But it is a reminder that most members of OPEC are happy with current
high oil prices, and many of them need oil to remain above $95 a barrel just to
balance their budgets.
However, it's not all gloom. If other OPEC members do cut production,
"spare production capacities will also rise, which is also a negative
factor for oil prices," said analysts at Commerzbank in a research note.
OPEC spare capacity is strongly related to oil prices. When it is high, there
is little risk that an unexpected supply disruption in one area could cause
serious oil shortages, so prices tend to stay relatively low. When spare
capacity is low, the risk of a sudden oil shortage grows and prices tend to
rise.
Having to compensate for lost Libyan supplies pushed OPEC's spare production
capacity to its lowest level since 2008, the last time prices spiked above $100
a barrel.
El-Badri said current oil prices have a risk-premium of $16-20 a barrel. If
Libya
does
return to normal, this premium should shrink, although continuing turmoil in
the region means it is unlikely to disappear altogether.
Europe
's refiners can also take comfort in the fact that,
even if total oil supply does not rise, they should soon be getting more of
their favorite light sweet oil from
Libya
.
Supply of this type of oil has been particularly tight in recent months,
pushing the price of European benchmark Brent crude to very high premiums over
U.S.
benchmark WTI, said KBC Energy Economics in a research note. More Libyan oil
should close this gap, helping European refiners close the profitability gap
with their
U.S.
rivals.
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