Saudis pledge to make up shortfall as Libyan output plunges
Dubai (Platts)--24Feb2011/457 pm EST/2157 GMT
Saudi Arabia moved to reassure oil consumers Thursday it would tap its
vast spare capacity to make up for any supply shortfall as Libya descended
into anarchy and its oil production plummeted.
Brent crude and New York light sweet crude futures rose to 30-month highs
in early trade even before Eni CEO Paulo Scaroni said Libya's total oil output
had slumped by 1.2 million b/d amid violent confrontations between anti-regime
protesters and the security forces of a defiant Moammar Qadhafi. The IEA
estimated Libyan crude output before the disruption around 1.58 million b/d.
Front-month Brent crude oil shot up to a high of $119.79/b within minutes
of the start of the European trading day, a gain of $8.50/b on the settle
Wednesday, while New York light sweet oil futures rose to an intra-day high
of $103.41/b, up over $5/b, on the Libyan fears.
Official confirmation from Libya of the extent of production outages has
been impossible. Estimates from analysts have varied significantly but have
been rising in the last two days, with Citi Thursday saying its "best
guess" was that some 800,000 b/d was offline.
The International Energy Agency Thursday said 500,000-750,000 b/d of
crude appeared to have been recently removed from the world oil market,
although it did not directly cite the deepening turmoil in Libya as
the reason for offline production.
The agency, the industrialized world's energy watchdog, said both
producing and consuming countries had "tools to deliver adequate oil to the
market." It said it was "in close contact with OPEC and major producer
countries" and that its members had 1.6 billion barrels of emergency oil
stocks at their disposal.
Barclays Capital analysts Thursday estimated the volume of shuttered
production at about 1 million b/d and rising. Indeed, "to all intents and
purposes, for the global market, oil production in Libya is down to nothing,
as exports from the country have effectively stopped," they said.
"Under such circumstances, only an explicit statement from the key
producers, not outlining their intent to increase production, but stating some
measure put in place to replace the lost barrels will calm markets, given the
level of fear that grips sentiment currently, despite the Saudi Arabian crude
not being an exact match for the lost Libyan production," Barclays said.
SAUDI SPARE CAPACITY
After the meteoric price climb, prices eased after a Saudi source said
the kingdom would be able to ramp up production of lighter grades to make
up for the loss of Libyan high quality light grades to Europe.
"There is no reason for the price to go up," said a Saudi source in
response to the price move. "Saudi Arabia is willing and capable of replacing
all missing oil and by the same quality of oil, Arab Extra Light," he said.
"Saudi oil can flow through the East-West Pipeline and then to the
Mediterranean to shorten the time," the source said. "Some West African oil
which goes to Asia can be redirected to Europe and extra Saudi oil can go to
Asia to replace it." With current crude oil output of 8.4 million b/d, Saudi
Arabia has nearly 4 million b/d of spare production capacity that it can bring
on line within a relatively short time.
According to the European Commission, Saudi Arabia has already been
supplying additional crude to the EU. "The EU imports 10% of its oil from
Libya," EC energy spokeswoman Marlene Holzner said in Brussels. "Production
has been stopped but the EU is receiving extra supplies from alternative
suppliers, such as Saudi Arabia."
As refiners in the Mediterranean started looking around for possible
alternatives to Libyan barrels, Greece's Hellenic Petroleum is considering
buying crude from West Africa, a source close to the company said.
A source at Italy's Eni, one of the biggest users of Libyan oil, was
doubtful about the prospects of using Saudi crude to replace any missing
Libyan barrels, saying that Saudi crude was generally more sour than the
Libyan grades his company normally buys.
A source at another Mediterranean refiner said his company might look to
Iran as an alternative source to cover its normal supplies of Libya's al-Jurf,
a sour crude grade.
Iran, which has been hoarding crude oil on tankers in the Persian Gulf in
recent weeks, has shifted some 5 million-6 million barrels of oil into the
Mediterranean market in recent days, taking advantage of what traders said
appeared to be a "flat price game" in the current market.
Iran's sales from storage -- which shipping sources said last week had
ballooned to around 20 million-25 million barrels -- is not necessarily
related to uncertainty about export volumes from Libya though it is likely
that European refiners may be in the market for Middle Eastern grades.
Very few countries have the ability to raise output quickly, and Russia,
the world's biggest oil producer, seems unable to help. State pipeline
operator Transneft told Platts that oil producers had not applied for
any increases in crude shipments to western markets.
Russia's Rosneft and Lukoil confirmed their crude shipments to Europe
were in line with previously approved loading programs and export obligations.
European companies are major producers in Libya, and more details emerged
of the ever-changing production climate there. Austria's OMV said production
had been suspended at its only operated field in Libya, the Shateira field,
and could not say when production would be restarted.
OMV operates one block in Libya and is a junior partner in other fields
in the country with partners Spain's Repsol, France's Total and Libya's
National Oil Corp. An OMV spokesman said that as far as he knew, production at
these sites was also "heavily affected." And Repsol said production at blocks
where it is active was down to 160,000 b/d from 360,000 b/d.
ENI SHUTS 60% LIBYA PRODUCTION
But it was Eni CEO Scaroni who gave the first overall number of
production outages in Libya. "Naturally there is speculation which is
amplifying a real phenomenon," an Eni spokesman confirmed Scaroni saying in
Rome. "The real phenomenon is there is 1.2 million b/d less on the market,
which is not a huge thing, but it is something and there is also a sense of
general uncertainty in the region which can be the trigger for speculation."
Scaroni also said Eni, Libya's biggest foreign producer, has shut almost
60% of its own Libyan oil and gas production. "In Libya we normally produce
280,000 b/d of oil equivalent with much of this gas," Italy's ANSA news agency
cited Scaroni telling reporters in Rome. "At the moment we are at around
Meanwhile, confusion continued to dominate the market with regard to
Libya's oil export ability. Several prompt crude loadings for March have been
canceled, although so far there have been no reported declarations of force
majeure on crude exports, crude traders said Thursday.
One trader at a European refiner said two cargoes of Amna crude due to
load in early March had been canceled, while a second trader said loadings of
Sarir crude had been suspended. "We were due to load one in the next few days
but it's not there anymore; it seems to have evaporated," said the source. "We
have another one further out but that one isn't there anymore either."
Exports of other Libyan crudes, including Mellitah and Sharara, have not
been disrupted by the escalating crisis in Libya, sources said, although bad
weather has delayed loadings, according to at least one trader.
Meanwhile, shipowners have reported no disruption to crude loadings at
Es Sider, Ras Lanuf and El Brega earlier in the week.
A source at the Libyan Emirates Oil Refining Company said the 220,000 b/d
refinery at Ras Lanuf on Libya's Mediterranean Coast continued to operate
despite the unrest. Other sources intending to load product from the location
have also confirmed that, for the moment, the message remains business as
The crisis in the Middle East has put immense pressure on crude futures
prices, and the EC's Holzner said the EU was concerned about the negative
economic impact if prices remain over $100/b for a number of months.
--Staff reports, firstname.lastname@example.org
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