Fears of Saudi Effect Push Oil Prices Up


Even as the most active contract for U.S. oil prices hit $100 a barrel for the first time since October 2008, upward momentum in Brent crude prices continues to surpass gains at the New York Mercantile Exchange.

The more than 5 percent surge in Brent crude futures on Wednesday has been amplified not only on the basis of outright supply losses, but concerns that light, sweet Libyan crude is similar in grade to the already tight Brent crude supplies.

The amount of oil produced in Libya is about equal to the amount of oil produced in the Gulf of Mexico. Right now, estimates of the loss of production range from one-half to one-third of daily output, but some analysts see a full halt to production imminent.

"The loss of Libyan oil production is like having a hurricane come through the Gulf, shutting down production, but leaving all the refineries and consumer demand intact," says Houston-based energy analyst Andy Lipow.

There is oil to replace any lost production. At least that's what the International Energy Agency and Saudi Arabia have been saying. But it not be the "right" kind of oil nor will it come soon enough.

"While we have the potential to see supply additions from OPEC, there is concern as to whether we will see a one-for-one replacement," says JP Morgan Chase energy analyst Lawrence Eagles.

"If, for example, we were to lose 1.3 million barrels per day of Libyan exports," Eagles added, "we would need Saudi Arabia and the UAE to push production up to levels not seen since the peak of 2008."

Saudi oil minister Ali Al-Naimi has held a tough stance, repeatedly assuring the markets that OPEC is ready to meet any shortage in supply. The International Energy Agency says that OPEC has spare capacity of five million barrels per day, up from only about two million barrels in 2008.

While OPEC can make up the lost supply, most of that crude oil will be made up of heavy, high-sulfur grade, which is not easily processed by the many refineries that process the light, sweet crude that the world seeks and that Libya offers, Lipow says.

But the biggest fear—the fear that has helped catapulte oil prices to highs not seen since the fall of 2008—is that the unrest in Libya will spread to other countries. A halt in production in Libya and Algeria could send oil prices to $220 a barrel, according to a research note today from Nomura Securities . That calculates OPEC spare capacity at two million barrels per day, but does not factor in supply disruption in Saudi Arabia, the world's largest oil exporter.

This is what's really spooking the markets. If events keep developing at this pace, says energy analyst Peter Beutel, it is hard to persuade investors that events will not spill over into Saudi Arabia. He says traders are "terrified" of the spillover effect—and that fear is likely to continue to keep oil prices soaring.

Still, youth in Saudi Arabia's capital city are jubilant about the return of King Abdullah, possibly casting doubt on whether the market's apprehension is justified. (See report here.)