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Schork Oil Outlook: Fear of Contagion Realized in Libya

Members of Libya’s mission to the United Nations publicly repudiated Col. Muammar el-Qaddafi on Monday, calling him a genocidal war criminal responsible for mass shootings of demonstrators protesting against his four decades in power. They called upon him to resign.
- The New York Times, 02/21/2011

The quote above demonstrates how extreme tensions have become regarding Libya. Warplanes are said to be strafing protestors in Tripoli, the capital, while Benghazi, the second largest city, is said to be in the hands of the insurgency.

As was the case with Egypt, crude oil prices have rocketed higher in response, albeit to an even greater degree. When serious protests broke out in Egypt, on January 28th, front month WTI rose $3.70. Yesterday, WTI was up $7.23 as of writing.

The difference between the two gains, and the two countries, is due to fundamentals. Egypt’s oil production has been in a long term decline, peaking in 1996 at 0.94 Mbbls/d and currently standing at just 0.66 MMbbls/d. Its importance to the global market was more dependent on the Suez Canal and the Sumed pipeline. If either of these were to be cut-off, crude oil tankers would have to take a six day detour to reach the Med but would eventually get there. Protests also took place far from the canal, and shipping companies did not reroute tankers or relocate employees.

On the other hand, Libya is a large and growing producer of crude oil, responsible for 1.80 MMbbls/d as of 2009 — almost triple Egypt’s output. The country’s hydrocarbon industry accounted for 95% of export earnings and 80% of fiscal revenues as of 2008.

According to the Oil and Gas Journal, Libya sits atop ~44 billion barrels of crude oil reserves, the largest of any nation in Africa. In contrast, Egypt had just ~3.3 bn barrels of crude according to the EIA. And while Egyptian protestors/government officials shied away from mentioning crude oil, the International Business Times is reporting that a tribal leader in Eastern Libya has “threatened to curtail oil exports to Europe if the government does not back down from attacking protestors.”

If these production facilities are shut down, damaged or destroyed, there is a very real chance that they will not come back for some time – Iraq’s oil fields have yet to reach pre-war production levels (i.e. 2009 produced less than 2003).

Estimates are that Libya accounts for ~10% of European oil imports. As illustrated in today’s issue of The Schork Report, only 5% of the country’s exports reached the U.S., but a large majority went to France, Spain, Germany and Italy, countries already concerned over North Sea disruptions, refinery turnarounds and increasing demand from recovering economies – as reflected by the Brent premium, which has weakened slightly over the last several trading sessions but remains near historical highs at ~-$10.00.

The threat in Libya also seems less abstract than the mostly-peaceful demonstrations seen in Egypt. In turn Italian super-major ENI, which is considered the largest (and most certainly the oldest) foreign energy producer in Libya, released a statement yesterday that “repatriation of its employees’ family members… and of non-essential personnel is underway”.

Similarly, Norwegian Statoil stated that “The safety of our personnel is our main priority” as it announced plans to shutter its Tripoli office and remove foreign workers. Austria’s OMV planned to evacuate non-essential staff. BP’s Chief Executive Robert Dudley stated, “We have operations there that are very limited. We remain committed to doing business there”.

Yet doing it may become very difficult in the weeks, if not months, ahead, and BP too is looking to evacuate workers from Tripoli.

Bottom line, The Schork Report is advising clients that we are maintaining our daily and weekly bullish biases in the NYMEX and ICE liquids.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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