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Oil & Gas/Chemicals | GLOBAL -This week’s highlights
The closest comparison to the current MENA unrest is the 1990-91 Gulf War. If Libya
and Algeria were to halt oil production together, prices could peak above US$220/bbl
and OPEC spare capacity will be reduced to 2.1mmbbl/d, similar to levels seen during
the Gulf war and when prices hit US$147/bbl in 2008. This could also result in a
temporary demand destruction of some 2.0mmbbl/d globally.
Oil Market Update – ‘MENA crisis to
further fuel oil prices?’
In order to estimate the impact the current MENA crisis could have on oil supply
and prices, we analysed past crises that rocked the region. There have been a
few events that drove oil prices higher (from 30% to 130% per event), most of
which were during the period in which OPEC controlled oil prices. However, we
believe the closest comparison is the 1990-91 Gulf War as this is the only event
outside of that period. During the seven months of Gulf War, prices jumped 130%
as OPEC spare capacity was reduced to 1.8mmbbl/d while demand came off
briefly by 1.7%. Similarly, today, if Libya and Algeria were to halt operations,
OPEC spare capacity will also likely be drawn down to 2.1mmbbl/d, in our view,
which could fuel higher oil prices.
We have identified three distinct stages of the Gulf war which led to changes in
oil prices and we believe we are only at the initial stage of the three stage
process for the current MENA unrest. During the initial stage of the Gulf war,
prices moved up by 21%. This is comparable to what we have seen recently
when oil price went up by 13% since the beginning of the MENA unrest. As we
see further evidence of real supply disruption, we will be moving into Stage 2 of
the event – during this stage of the Gulf war, prices moved to its peak (up 130%)
within a period of two months. On the assumption that prices will move up by the
same amount, we could see US$220/bbl should both Libya and Algeria halt their
oil production. We could be underestimating this as speculative activities were
largely not present in 1990-91.
Open interest in WTI futures contracts has risen 2.4% since the beginning of
the MENA crisis in January this year. On the other hand, open interest in Brent
future contracts has fallen 7.6% during the same period. This was primarily on
back of the large WTI-Brent differential during the period, as WTI crude prices
are being suppressed by Cushing storage and infrastructure issues while Brent
crude price was lifted by supply outages in North Sea fields.
More turmoil in MENA
Over the past week, the crisis in the Middle East and North Africa (MENA) region,
which led to the overthrow of President Ben Ali in Tunisia and President Hosni
Mubarak in Egypt, has spread much further, with Yemen, Libya, Algeria, Bahrain and
Iran being the most vulnerable, as per our Senior Political Analyst Alastair Newton. He
also believes that after Egypt, Libyan leader Muammar Gaddafi could be the next one
to go. According to the Time Magazine, Algeria also remains very vulnerable. Protests
have already led the Algerian government to lift the 19-year old state of emergency
last week, and the country remains a stronghold of Islamic militants. However, the civil
unrest in Iran has been going on for a long time and the current outburst seems
disconnected from the rest of the region. While the exact extent of the geopolitical risk
and its impact is difficult to ascertain with the crisis spreading like wildfire, we attempt
to draw up a scenario for oil prices if the current turmoil continues.
Potential shut-ins in Libya, Algeria could affect supply: In January 2011,
Libya produced 1.58mmbbl/d while Algeria produced another 1.27mmbbl/d of oil. With
the Libyan protests gaining strength over the past week, there has been considerable
risk of possible supply shut-ins in the country. So far, while the Libya National Oil
Corporation has said that it has no information about a disruption in production of
crude, Al-Jazeera has reported that Libya’s Nafoora oil field had stopped producing
because of an employee strike. According to Thomson Reuters, Shell has stopped its
operations in Libya whereas Total, Statoil and Wintershall are suspending operations
and are in the process of evacuating international staff. While the country’s biggest oil
producer, Eni has said that its production is continuing as normal even as it evacuates
non-essential staff and family members of employees
In addition, there have been terrorist threats to oil infrastructure in Algeria, given the
current political situation in the country. We believe that if the crisis worsens, we could
see further supply shut-ins in both Libya and Algeria, especially in the onshore fields.
Also, if a regime change were to happen in the countries, all existing contracts with
IOCs could be under threat and may be cancelled or re-evaluated, leading to a drop in
supply in the near-term.
Scenario analysis of past crises in the Middle East on oil supply and
prices: In order to estimate the possible impact MENA crisis has on oil supply and
prices, we analyse the past crises that have rocked the region. There have been a few
events that drove oil prices higher, most of which are during the period in which OPEC
controlled oil prices. For example, during the 1973 Arab-Israel war, OPEC increased
oil prices by US$6.5/bbl or 128%, while in 1979-1981 the Iran revolution followed by
the Iran-Iraq war saw oil prices move up by about 77%. In fact the only major event
that is comparable is the Gulf War in 1990-91 as it is the only event in the Middle East
which seems close to the ongoing crisis during the free-market pricing era. Before the
Gulf War, OPEC spare capacity stood at 5.9mmbbl/d. During the war, OPEC
production capacity was severely reduced (OPEC spare capacity came down to less
than 2.0mmbbl/d) and oil prices jumped 130% in a period of two and a half months.
We can identify three distinct stages of the Gulf war which led to changes in oil prices.
The initial phase is the anticipation of war and just the threat to oil supply; during this
period, oil prices moved up by 21%. This is comparable to what we have seen recently
- oil price is up by 13% since the beginning of the MENA unrest and we believe we are
still at the initial stage of the three stage process for the current MENA unrest. As we
see further evidence of real supply disruption, we will be moving into stage 2 of the
event. The second stage is the actual reduction in oil supply when the Gulf war started
and during this period oil price moved to its peak of US$41/bbl, up 109% within a
period of two months. The third stage will mark the end of the crisis with the
anticipation that supply will resume and during the Gulf war, prices returned back to
pre-crisis level (below US$20/bbl) in three months.
Currently, OPEC spare capacity stands at 5.2mmbbl/d & OPEC has said that it is
willing to increase output if need be. If Libya and Algeria go offline, one can see a
3.1mmbbl/d of reduction in production capacity pushing spare capacity again to
2.1mmbbl/d, as seen in 1990-91. Even in 2008, when oil prices reached US$147/bbl,
OPEC spare capacity was as low as 2.3mmbbl/d in June 2008, causing prices to spike
a month later. Based on the Gulf War, coupled with the fact that demand is much
higher now, leaving a lower spare capacity as % of demand, we estimate oil could
fetch well above US$220/bbl, should Libya and Algeria stop production. We could be
underestimating this as speculative activities were largely not present in 1990-91.
High inventories reduce concerns for the very near term: While the
supply disruptions from the Middle East threaten to pose a serious concern to the
global oil markets, high global crude inventories could help in case the disruptions
were to remain only for a very short term. According to Thomson Reuters, OECD
countries agreed this week to release oil from stockpiles to meet any supply
disruptions. According to IEA, OECD industry crude inventory currently stands at
968mmbbl with government controlled inventory being an additional 1,302mmbbl. This
translates to 48 days of demand cover in the OECD region. In addition, oil products
provide for another 42 days of demand cover in the region. However, if the supply
disruptions were to sustain for a longer period, we could see an imbalance in the oil
markets.
Current OPEC spare capacity sufficient to ward off immediate supply
concerns: Currently, OPEC spare capacity stands at 5.2mmbbl/d with 3.5mmbbl/d
of that coming from Saudi Arabia. As a result, we believe that there is enough spare
capacity available in the OPEC to ward off any near-term supply disruptions owing to
the crisis as it stands currently. However, we could see a spike in oil prices in case
supply is actually disrupted, given the uncertainty that it would bring.
Situation could worsen if crisis spreads further to other oil producing
countries: If the situation in the region were to worsen in a way that it encompasses
other oil producing countries as well in the future, the oil supply-demand balance could
change very rapidly. In particular, if the crisis were to spread to Saudi Arabia,
(possibility of which is quite low at present according to our Senior Political Analyst
Alastair Newton), there can be real threat to global oil production, the impact of which
is impossible to ascertain on prices. In addition, the recovery in Middle East oil
production would depend upon the extent of damage to oil infrastructure during the
crisis and the extent of restoration of stability. Overall, we do not rule out the possibility
of oil prices touching record highs in excess of US$200/bbl in the near term, should the
MENA crisis continue to spread over the coming weeks.
High oil price could lead to demand destruction: We try to analyse the
impact of higher oil price on global oil demand growth. For this purpose we look at the
demand destruction that occurred during the Gulf war and accordingly estimate that a
high oil price scenario, as estimated earlier, could dent the oil demand growth
momentum by about 2.4% or 1.05mmbbl/d. However, with demand growth estimated
at 1.8mmbbl/d for 2011F, we estimate that the total demand growth could fall to about
0.7mmbbl/d in 2011F, should we see oil price at US$220/bl.
Weekly events summary
1. International Energy Forum signs charter amidst Middle East uncertainty
IEA is ready to release oil from stockpiles if Middle East unrest continues.
2. Commercial crude stocks in China rose 2.5% m-m in January
Refined product stocks also rose by 11% m-m in January.
Key oil market events during the week
1. International Energy Forum signs charter amidst Middle East uncertainty: On
22 February 2011, energy producers and consumers met at Riyadh in the
International Energy Forum (IEF), which was being looked upon as the meeting
point of problem solvers for the ongoing Middle East crisis. The charter aims at
“encouraging stability and moderation in crude markets after the political turmoil in
Middle East countries”. According to Bloomberg, WTI and Brent crude prices have
reached a new two and a half year high recently amidst the crisis. The
International Energy Agency (IEA) chief economist, Faith Birol, assured the oil
markets during the conference by confirming that industrialised nations will be
ready to release oil from stockpiles to meet any Middle East supply disruptions.
Earlier, the OPEC had also said that member countries can increase production to
take care of any shortfall in production from the region, due to the crisis (according
to Thomson Reuters). However, IEA feels that oil prices are currently in the
‘danger zone’ and could rise further if turmoil continues in the Middle East.
2. Commercial crude stocks in China rose 2.5% m-m in January: According to
Xinhua News Agency and Thomson Reuters, commercial crude stocks in China
rose by 2.5% m-m at the end of January. Refined products stocks also rose by
11% m-m, led primarily by diesel. Diesel stocks rose by 25% m-m where as
gasoline stocks fell by 1.4% m-m. According to Thomson Reuters, these numbers
were in line with those reported earlier in February by Sinopec, which said that its
diesel stocks rose by 93% y-y to a record level. The rise in China fuel stocks
indicates that refiners continue to replenish their fuel storage tanks with higher
crude runs (refinery throughput in January is estimated to exceed 38mn tonnes).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Gas/Chemicals | GLOBAL -This week’s highlights
The closest comparison to the current MENA unrest is the 1990-91 Gulf War. If Libya
and Algeria were to halt oil production together, prices could peak above US$220/bbl
and OPEC spare capacity will be reduced to 2.1mmbbl/d, similar to levels seen during
the Gulf war and when prices hit US$147/bbl in 2008. This could also result in a
temporary demand destruction of some 2.0mmbbl/d globally.
Oil Market Update – ‘MENA crisis to
further fuel oil prices?’
In order to estimate the impact the current MENA crisis could have on oil supply
and prices, we analysed past crises that rocked the region. There have been a
few events that drove oil prices higher (from 30% to 130% per event), most of
which were during the period in which OPEC controlled oil prices. However, we
believe the closest comparison is the 1990-91 Gulf War as this is the only event
outside of that period. During the seven months of Gulf War, prices jumped 130%
as OPEC spare capacity was reduced to 1.8mmbbl/d while demand came off
briefly by 1.7%. Similarly, today, if Libya and Algeria were to halt operations,
OPEC spare capacity will also likely be drawn down to 2.1mmbbl/d, in our view,
which could fuel higher oil prices.
We have identified three distinct stages of the Gulf war which led to changes in
oil prices and we believe we are only at the initial stage of the three stage
process for the current MENA unrest. During the initial stage of the Gulf war,
prices moved up by 21%. This is comparable to what we have seen recently
when oil price went up by 13% since the beginning of the MENA unrest. As we
see further evidence of real supply disruption, we will be moving into Stage 2 of
the event – during this stage of the Gulf war, prices moved to its peak (up 130%)
within a period of two months. On the assumption that prices will move up by the
same amount, we could see US$220/bbl should both Libya and Algeria halt their
oil production. We could be underestimating this as speculative activities were
largely not present in 1990-91.
Open interest in WTI futures contracts has risen 2.4% since the beginning of
the MENA crisis in January this year. On the other hand, open interest in Brent
future contracts has fallen 7.6% during the same period. This was primarily on
back of the large WTI-Brent differential during the period, as WTI crude prices
are being suppressed by Cushing storage and infrastructure issues while Brent
crude price was lifted by supply outages in North Sea fields.
More turmoil in MENA
Over the past week, the crisis in the Middle East and North Africa (MENA) region,
which led to the overthrow of President Ben Ali in Tunisia and President Hosni
Mubarak in Egypt, has spread much further, with Yemen, Libya, Algeria, Bahrain and
Iran being the most vulnerable, as per our Senior Political Analyst Alastair Newton. He
also believes that after Egypt, Libyan leader Muammar Gaddafi could be the next one
to go. According to the Time Magazine, Algeria also remains very vulnerable. Protests
have already led the Algerian government to lift the 19-year old state of emergency
last week, and the country remains a stronghold of Islamic militants. However, the civil
unrest in Iran has been going on for a long time and the current outburst seems
disconnected from the rest of the region. While the exact extent of the geopolitical risk
and its impact is difficult to ascertain with the crisis spreading like wildfire, we attempt
to draw up a scenario for oil prices if the current turmoil continues.
Potential shut-ins in Libya, Algeria could affect supply: In January 2011,
Libya produced 1.58mmbbl/d while Algeria produced another 1.27mmbbl/d of oil. With
the Libyan protests gaining strength over the past week, there has been considerable
risk of possible supply shut-ins in the country. So far, while the Libya National Oil
Corporation has said that it has no information about a disruption in production of
crude, Al-Jazeera has reported that Libya’s Nafoora oil field had stopped producing
because of an employee strike. According to Thomson Reuters, Shell has stopped its
operations in Libya whereas Total, Statoil and Wintershall are suspending operations
and are in the process of evacuating international staff. While the country’s biggest oil
producer, Eni has said that its production is continuing as normal even as it evacuates
non-essential staff and family members of employees
In addition, there have been terrorist threats to oil infrastructure in Algeria, given the
current political situation in the country. We believe that if the crisis worsens, we could
see further supply shut-ins in both Libya and Algeria, especially in the onshore fields.
Also, if a regime change were to happen in the countries, all existing contracts with
IOCs could be under threat and may be cancelled or re-evaluated, leading to a drop in
supply in the near-term.
Scenario analysis of past crises in the Middle East on oil supply and
prices: In order to estimate the possible impact MENA crisis has on oil supply and
prices, we analyse the past crises that have rocked the region. There have been a few
events that drove oil prices higher, most of which are during the period in which OPEC
controlled oil prices. For example, during the 1973 Arab-Israel war, OPEC increased
oil prices by US$6.5/bbl or 128%, while in 1979-1981 the Iran revolution followed by
the Iran-Iraq war saw oil prices move up by about 77%. In fact the only major event
that is comparable is the Gulf War in 1990-91 as it is the only event in the Middle East
which seems close to the ongoing crisis during the free-market pricing era. Before the
Gulf War, OPEC spare capacity stood at 5.9mmbbl/d. During the war, OPEC
production capacity was severely reduced (OPEC spare capacity came down to less
than 2.0mmbbl/d) and oil prices jumped 130% in a period of two and a half months.
We can identify three distinct stages of the Gulf war which led to changes in oil prices.
The initial phase is the anticipation of war and just the threat to oil supply; during this
period, oil prices moved up by 21%. This is comparable to what we have seen recently
- oil price is up by 13% since the beginning of the MENA unrest and we believe we are
still at the initial stage of the three stage process for the current MENA unrest. As we
see further evidence of real supply disruption, we will be moving into stage 2 of the
event. The second stage is the actual reduction in oil supply when the Gulf war started
and during this period oil price moved to its peak of US$41/bbl, up 109% within a
period of two months. The third stage will mark the end of the crisis with the
anticipation that supply will resume and during the Gulf war, prices returned back to
pre-crisis level (below US$20/bbl) in three months.
Currently, OPEC spare capacity stands at 5.2mmbbl/d & OPEC has said that it is
willing to increase output if need be. If Libya and Algeria go offline, one can see a
3.1mmbbl/d of reduction in production capacity pushing spare capacity again to
2.1mmbbl/d, as seen in 1990-91. Even in 2008, when oil prices reached US$147/bbl,
OPEC spare capacity was as low as 2.3mmbbl/d in June 2008, causing prices to spike
a month later. Based on the Gulf War, coupled with the fact that demand is much
higher now, leaving a lower spare capacity as % of demand, we estimate oil could
fetch well above US$220/bbl, should Libya and Algeria stop production. We could be
underestimating this as speculative activities were largely not present in 1990-91.
High inventories reduce concerns for the very near term: While the
supply disruptions from the Middle East threaten to pose a serious concern to the
global oil markets, high global crude inventories could help in case the disruptions
were to remain only for a very short term. According to Thomson Reuters, OECD
countries agreed this week to release oil from stockpiles to meet any supply
disruptions. According to IEA, OECD industry crude inventory currently stands at
968mmbbl with government controlled inventory being an additional 1,302mmbbl. This
translates to 48 days of demand cover in the OECD region. In addition, oil products
provide for another 42 days of demand cover in the region. However, if the supply
disruptions were to sustain for a longer period, we could see an imbalance in the oil
markets.
Current OPEC spare capacity sufficient to ward off immediate supply
concerns: Currently, OPEC spare capacity stands at 5.2mmbbl/d with 3.5mmbbl/d
of that coming from Saudi Arabia. As a result, we believe that there is enough spare
capacity available in the OPEC to ward off any near-term supply disruptions owing to
the crisis as it stands currently. However, we could see a spike in oil prices in case
supply is actually disrupted, given the uncertainty that it would bring.
Situation could worsen if crisis spreads further to other oil producing
countries: If the situation in the region were to worsen in a way that it encompasses
other oil producing countries as well in the future, the oil supply-demand balance could
change very rapidly. In particular, if the crisis were to spread to Saudi Arabia,
(possibility of which is quite low at present according to our Senior Political Analyst
Alastair Newton), there can be real threat to global oil production, the impact of which
is impossible to ascertain on prices. In addition, the recovery in Middle East oil
production would depend upon the extent of damage to oil infrastructure during the
crisis and the extent of restoration of stability. Overall, we do not rule out the possibility
of oil prices touching record highs in excess of US$200/bbl in the near term, should the
MENA crisis continue to spread over the coming weeks.
High oil price could lead to demand destruction: We try to analyse the
impact of higher oil price on global oil demand growth. For this purpose we look at the
demand destruction that occurred during the Gulf war and accordingly estimate that a
high oil price scenario, as estimated earlier, could dent the oil demand growth
momentum by about 2.4% or 1.05mmbbl/d. However, with demand growth estimated
at 1.8mmbbl/d for 2011F, we estimate that the total demand growth could fall to about
0.7mmbbl/d in 2011F, should we see oil price at US$220/bl.
Weekly events summary
1. International Energy Forum signs charter amidst Middle East uncertainty
IEA is ready to release oil from stockpiles if Middle East unrest continues.
2. Commercial crude stocks in China rose 2.5% m-m in January
Refined product stocks also rose by 11% m-m in January.
Key oil market events during the week
1. International Energy Forum signs charter amidst Middle East uncertainty: On
22 February 2011, energy producers and consumers met at Riyadh in the
International Energy Forum (IEF), which was being looked upon as the meeting
point of problem solvers for the ongoing Middle East crisis. The charter aims at
“encouraging stability and moderation in crude markets after the political turmoil in
Middle East countries”. According to Bloomberg, WTI and Brent crude prices have
reached a new two and a half year high recently amidst the crisis. The
International Energy Agency (IEA) chief economist, Faith Birol, assured the oil
markets during the conference by confirming that industrialised nations will be
ready to release oil from stockpiles to meet any Middle East supply disruptions.
Earlier, the OPEC had also said that member countries can increase production to
take care of any shortfall in production from the region, due to the crisis (according
to Thomson Reuters). However, IEA feels that oil prices are currently in the
‘danger zone’ and could rise further if turmoil continues in the Middle East.
2. Commercial crude stocks in China rose 2.5% m-m in January: According to
Xinhua News Agency and Thomson Reuters, commercial crude stocks in China
rose by 2.5% m-m at the end of January. Refined products stocks also rose by
11% m-m, led primarily by diesel. Diesel stocks rose by 25% m-m where as
gasoline stocks fell by 1.4% m-m. According to Thomson Reuters, these numbers
were in line with those reported earlier in February by Sinopec, which said that its
diesel stocks rose by 93% y-y to a record level. The rise in China fuel stocks
indicates that refiners continue to replenish their fuel storage tanks with higher
crude runs (refinery throughput in January is estimated to exceed 38mn tonnes).
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