Our advice to Italy, which imports 425,000 barrels of oil each day from Tripoli: "Panic." Following yesterday's Force Majeure announcement from Libya which meant that oil production and exports will continue only for a few more days, the FT now reports that over half of Libya's production, or about 800,000 barrels is now offline. As Libya accounts for ~2% of global oil exports, this means that 1% of world oil output has just been removed. And to all those who claim that excess OPEC capacity can be easily substituted, sorry it can't - Libyan crude is far higher in quality than the general muck, meaning it is not a simple apples for apples replacement. From the FT: "Industry executives told the Financial Times that at least half of Libya’s 1.6m barrels a day oil output had been closed down. They cautioned, however, that they could only estimate the total outage since they did not have direct knowledge of production at their competitors’ oilfields." And if Nomura's earlier call is correct that a combined Libya-Algeria oil stoppage will result in the doubling of crude prices (and one can only imagine what happens if Saudi is thrown into the fray), then our January call for "higher" oil may lead to some very tidy profits. In the meantime, we expect the partial Libyan oil closure to reach 100% shortly.
More from FT:
Spain’s Repsol and Germany’s Wintershall, part of the BASF group, have publicly announced that they have shut down production from Libya, estimated to be 350,000 b/d and 100,000 b/d respectively. In addition, traders and industry executives said that production had ceased at certain fields operated by Total of France and Italy’s Eni, equal to a further 300,000-350,000 b/d. The companies confirmed only that there had been some impact on their oil output.
The extent of the impact on oilfields operated by Libya’s national oil company, which accounts for about a quarter of the country’s production, was unclear.
Ms Sen estimated that as much as 1m b/d may have been shut down – more than 60 per cent of Libya’s total production. The rest of the country’s output is “increasingly under threat”, she added.
Traders added that Libya’s national oil company had declared force majeure – a legal clause allowing it to default on contracted deliveries – on contracts to export oil products. In addition, most of the country’s ports remain closed.
Lastly, expectations that OPEC can just step in and fill the void are largely unfounded, not in the least since peak OPEC output is likely vastly exaggerated.
“Without information on the scale and duration of any disruption, Opec cannot accurately gauge how much additional crude to produce. A release stocks by the IEA may meet market needs more closely,” Mr Eagles, former head of oil markets at the IEA, said in a note to clients.
Look for Brent to continue on its path to $120 over the next week, bringing it ever closer to its all time highs just over $140. Make that $140 if the US does, as some speculate, invade the region to bring "peace and stability" to the region.