Nomura Predicts $220 Oil If Just Libya, Algeria Cut Output

Tyler Durden's picture

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.

Full report:


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qmhedging's picture

Russia is waiting

r101958's picture

Spare capacity? Bwahahahhahahahahhahaha! I hate to say it but I will be looking for the 'deer in the headlight' faces of all the talking heads on CNBS. How about this; Saudi production has peaked and is now on the slide? That would explain a whole lot of recent geopolitical problems. One has to wonder, with all the current turmoil in the ME, if the pols don't get a ready made 'cover my a$$' excuse for rising oil prices? The prices can now be blamed on revolution in the ME instead of on PO and then they are off the hook for the terrible planning, no planning and/or kicking the can down the road policies. No?

A Texan's picture

...and then there's the old standby from the Obama playbook...

wait for it...

wait for it...

almost here...

...its BUSH'S FAULT!

falak pema's picture

Dubya had only one fault to account for : he was born a man in 1946. He should have changed sex at young age. But that was his father's fault. So it goes back two generations. Barbara Bush was the most intelligent of the Bush clan. She was no sheeple like her son. King sheeple. But I'm being tongue in cheek for those who venerate his WH passage in the two terms as head man.

Cash_is_Trash's picture

Yet, Obama continues to defy Bush Jr's disastrous terms. Obama is much worse than Dubya by a long-shot.

CHANGE, CHANGE we can finally believe in!


PulauHantu29's picture

What does Nomuira know? They are the ones who predicted gold will hit $1,400 too....How crazy is THAT?!

MarcusAurelius's picture

Would you pay $200.00 for a case of beer? How about $50.00 for each kilowatt of energy your house uses? No? What about $500.00 for groceries every time you go shopping? All the same time your salary is what it is NOW or less? I don't know maybe you would? Ok if your making 500K to 2 million a year maybe you don't mind as much but for the rest of us....uhhhhh I don't think so. Would I pay the prices of gas at $250.00 per barrel. Not a fiddlers chance in hell and we at least have it here in Canada. If the price of gas doubled or tripled from where it is now my car would sit idle quite a bit. I can assure you of that. Not too long after that there might just be this miraculous discovery of a new technology or a way to utlize scare oil far more effectively and efficiently. Don't think so? Then you miss the lessons of history. I have found it quite intersting that the price at the pumps has stayed at roughly the same price as it was when oil was $72.00 a barrel. A little lower but not much when it was $55.00 a barrel. When it was $147.00 a barrel back in 2007 it was a little higher but it took time to get there and when it was 125.00 a barrel the price was slightly but not that much as in .10 a litre more. Artificially controlled? You bet your ass it is. It isn't quite consumer screaming level yet but they will start to scream a lot quicker than in 2007 I can assure you of that should it continue to climb. Geithner and his stupidity calls that the economy can weather this storm and continue just fine????? Sure Tim.....and I have a lot of swamp land to sell you somewhere in the pits of South America too.

kummar's picture

If indeed these are the actors set on setting the world ablaze, they are more than likely the same ones who are involved in Greece, Portugal, Dubai, and elsewhere. Presenting: Moore Capital, Brevan Howard and Paulson & Co... Oh and JP Morgan and, ahem, Goldman Sachs.1975 Toyota Pick-Up Truck AC Compressor