Last night (Thursday), the United Nations approved military action against Libya, including a no fly zone and air strikes against Libyan forces. WTI and Brent rallied sharply in the electronic markets in response, but our question is: what took so long?
The U.N. has effectively given Libya a two week pass to import mercenaries, organize its army, load up its weapon stockpiles and free up cash (to pay the former and buy more of the latter). Put simply, things will get worse before they get better.
Crude oil prices fell this morning after the Libyans attempted to diffuse this situation, announcing an “immediate cease-fire and the stoppage of all military operations.” We’re not buying it, and neither is Britain, where a spokesman for the Prime Minister called for a focus on Qaddafi’s “actions, not his words,” and its military continued to ramp up military preparations.
Energy prices will be on a hair trigger with every news report out of the region. Libya holds Africa’s largest reserves of crude oil and produces 1.80 MMbbls/d of crude 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.
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. In fact, only 5% of the country’s exports reached the U.S., but a large majority (~79%) went to France, Spain, Germany and Italy, countries already concerned over North Sea disruptions and trouble in Bahrain — as reflected by the Brent premium, which has widened to $12.33 as of writing.
When the crisis in Libya first began, BP’s Chief Executive Robert Dudley released a statement that ”We have operations there that are very limited. We remain committed to doing business there.”
Yet doing it is become harder and more risky with each passing headline. Thus analysts at The Schork Report are advising clients that we remain unwilling to short crude oil or the inter-market spread until the Middle East region returns to some semblance of reconciliation.
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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.