Waiting for a Saudi revolution before buying those $200 oil calls? It may be time to reevaluate: according to Nomura a halt in just Libyan and Algerian oil production (far more likely than the crisis spilling over to Saudi) would send oil to over $220/bbl. Specifically "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." Wouldn't a doubling in price lead to a major demand plunge as well? Yes it would "This could also result in a temporary demand destruction of some 2.0mmbbl/d globally." Also, since the Fed's free money was not flooding global market last time, $220 is just a lowball estimate: "We could be underestimating this as speculative activities were largely not present in 1990-91."
More observations from Nomura's Michael Lo:
- 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.
And this is how excess capacity looks like per Nomura. If Wikileaks is right, and Saudi has been massively overestimating its reserves, $220 will be just the beginning.