The widespread unrest in Libya is currently dominating headlines. Popular unrest in such an oil-rich region inevitably has its consequences on oil production. The past few weeks have seen production in Libya all but cease, while production in Egypt has also been affected – although to a much lesser extent given that its regime change was for the most part, peaceful.
Such uncertainty has triggered an oil price spike, and the direction the oil price takes now depends much on whether oil supply disruption and regime change are constrained to North Africa, or will spread elsewhere in the Middle East.
Saudi Arabia, the world’s largest oil exporter, remains the only oil producing nation with significant spare capacity; we estimate at around three million barrels/day, which is more than sufficient to compensate for losses from Libya and Egypt in the short term. The Saudi Minister of Petroleum and Mineral Resources, Al-Naimi, has now given assurances that extra oil will be put on the market, and this has taken some pressure off the oil price, for now at least.
The world relies upon oil, and it therefore relies upon stability across the major oil exporting region. Any significant disruption in Saudi Arabia is likely to lead to oil prices ramping rapidly towards the USD200/barrel mark, and stalling the already fragile global economic recovery.
This has to be avoided, and in all likelihood, will be. However, we are in precarious times, and highly vulnerable to unforeseen events. As such, we expect to see the oil price remaining high, retaining a premium to reflect this uncertainty.
While the level of this ‘uncertainty premium’ will vary with the escalation or dampening of production instability, the underlying picture is not good. We were already expecting the level of global spare capacity to start tightening significantly by the end of 2012, so the underlying oil price will inevitably rise further on more fundamental issues.
Projects in the Middle East and North Africa are likely to be delayed, so the major oil consumers need to be realistic and tackle the issue of their overreliance on oil as a matter of urgency. This provides an investment backdrop that will not be easy, but which can be very positive if approached correctly.
