SocGen's Three Scenarios For Oil See Crude Price Between $110 And $200

Tyler Durden's picture

After Nomura released a report two weeks back predicting oil could rise to $220 if the MENA situation escalates, this morning SocGen's Michael Wittner has released his own scenario analysis on the possible outcomes of the 2011 revolutions. His three cases see oil within the following escalating thresholds: $110-$125; $125-$150; and $150-$200. We are fairly confident that the worst case, which as expected involves all sorts of bad things happening in Saudi Arabia, is missing an extra zero somewhere. Some key observations from the report (attached below): "The forward curve for Brent, the better indicator of global oil market fundamentals, is currently in backwardation (nearby premium, forward discount) for the next 5 years, reflecting concerns over growing physical tightness in the crude markets. The oil markets are pricing in an extended Libyan shutdown of crude exports (see below). Even on the WTI forward curve, where prices are still under pressure from local mid-continent US market conditions, the contango has eased and now only extends through 2011; from 2012 through 2015, WTI is also in backwardation. As the Libyan crisis has escalated, the latest US CFTC data show that non-commercial net length for NYMEX WTI futures has reached an all time high. This is a key indicator that a new wave of investor flows is now moving strongly into WTI and the oil complex in general. With the widespread unrest in the Middle East and North Africa (MENA) region expected to continue, and the oil markets worried about further supply disruptions, the attractiveness of commodities and oil to investors has been underscored. With oil prices driving heightened concerns over inflation, oil itself is seen as a good hedge against inflation." In summary, SocGen sees about $15/bbl risk premium built into current prices, which could jump to as much as $110.

Full SocGen Oil Market Scorecard:

Scenario highlights:

Geopolitical Scenario 1: Libya shutdown, plus widespread unrest in the Middle East and North Africa. Brent price range of $110-125/bbl

This is the scenario that we are in right now. Current shut-in Libya crude production - lost supply - is roughly estimated at around 1.0 Mb/d by the IEA. This leaves crude output of around 600-650 kb/d, compared to normal crude production of 1.65 Mb/d.

Crude exports were estimated at 500-600 kb/d in the past week by the IEA, compared to normal crude exports of 1.30-1.35 Mb/d.

With refinery operations disrupted, almost all crude supply was exported, though the export figures also include crude drawn from inventory at operating export terminals.

Will the shut-in volumes go higher? The answer is "yes". As the conflict drags on, it is entirely possible, and maybe even probable, that Libyan oil production and exports will drop all the way to zero, without foreign personnel from oil and oilfield service companies.

So far, in response to the loss of 1 Mb/d of Libyan crude, Saudi Arabia has reportedly increased production by 0.4 Mb/d to 9.0 Mb/d; the Saudis are probably in the process of increasing output further. As we have previously noted, the Saudis can make up the volumes but they cannot make up the quality. In contrast to high quality light sweet Libyan crude, most Saudi spare capacity is medium sour. The Saudis have said that they have some spare crude capacity that is comparable to Libyan grades, but it is unclear how much, and there is market skepticism about these claims.

Importantly, before the Libyan crisis, according to the IEA, Saudi Arabia had spare crude production capacity of 3.5 Mb/d (crude output of 8.6, compared to capacity of 12.1 Mb/d). But now, after increasing output by 0.4 Mb/d, Saudi spare capacity is down to 3.1 Mb/d. As they increase production, Saudi spare capacity will go lower. If Libyan exports go to zero and the Saudis make up for the entire 1.5 Mb/d by themselves, Saudi spare capacity will fall to 2 Mb/d.

Aside from "how big will the Libyan shut-ins get"?, another critical question for the oil markets is: "how long will the shut-ins last"? This is a huge wildcard - a "known unknown"  - and it depends on whether and when Gaddafi steps down or is forced out, and how long the developing civil war lasts.

Judging by elevated price levels across the crude forward curves, as well as the backwardation, the oil markets appear to be pricing in an extended Libyan shutdown, lasting several months. The markets are also pricing in continuing widespread unrest in MENA, but are not assuming actual oil disruptions in other countries.

Brent price range for Scenario 1: $110-125/bbl

Bullish factor: Saudi spare capacity declines, possibly all the way to 2 Mb/d.

Offsetting bearish factors: none. This scenario would not cause significant downgrades to global GDP growth or global oil demand growth. There is no chance of a release of IEA emergency strategic reserves in this scenario.

What if the situation in Libya is resolved and goes back to normal quickly? It would still take months for oil production and exports to get back to normal. Oil workers would need to return to Libya, and they would need to assess the condition of the oil fields.

Possible issues include reservoir damage and looting or sabotage of equipment at oilfields, pipelines, and terminals.

In addition, sanctions and legal restrictions recently imposed on Libya could complicate a return to normal trade and commerce.

Also, if there is a change in the state oil company due to a change in government, there could be contractual issues to deal with.

That said, our main concerns revolve around the oil fields themselves. The bottom line is that if the Libyan crisis ends, prices would fall, but not all the way to the pre-Egypt levels of $95-100 Brent, and not all at once. Prices would decline gradually, as flows are restored. However, the wider MENA unrest would still cause a residual risk premium in oil prices of perhaps $5.

Geopolitical Scenario 3: Unrest spreads to Saudi Arabia and threatens Saudi crude exports and any remaining spare capacity. Brent price range of $150-200/bbl.

In this most extreme, worst-case scenario for the oil markets, serious unrest spreads to Saudi Arabia. In this case, it does not really matter if Libya or any other producers are shut down or not. Saudi Arabia is OPEC's biggest producer and the world's biggest current holder of spare capacity. If production and exports are

Geopolitical Scenario 2: Libya shutdown, plus another shutdown in a medium-size producer, plus widespread unrest in the Middle East and North Africa. Brent price range of $125-150/bbl.

In the oil markets, there is a lot of concern and talk about more extreme geopolitical scenarios, although these are not explicitly priced in. One such scenario involves another supply disruption in another medium-size producer, while the Libya shutdown continues, and widespread MENA unrest also continues.

An example of this would be a supply disruption in Algeria, which exports 0.9 Mb/d of crude and NGLs and another 0.5 Mb/d of products. In total, this makes Algerian exports of 1.4 Mb/d very similar to Libyan exports of 1.5 Mb/d.

We must emphasize that we choose Algeria as an example here simply because of its export volumes. We do not believe that there is a high probability of unrest in Algeria, but will leave the geopolitical analysis of this country for another time. The purpose of this scenario exercise is to frame up broad price ranges and key market dynamics that need to be taken into account.

If Saudi Arabia starts with 2 Mb/d of spare capacity, because they are alone making up for a full Libyan shutdown, then they have enough left to make up for another 1.4 Mb/d of Algerian crude and product exports; we assume that Saudi crude will, in effect, substitute for Algerian product exports, and will be processed in spare refining capacity in Europe and elsewhere.

This would leave the Saudis with only 0.6 Mb/d of spare capacity. For oil market participants, this would be considered so low as to be "basically nothing left". This is especially true because in this scenario, we continue to have unrest and perceived threats to production elsewhere in MENA.

Also, remember that estimates of capacity in Saudi Arabia and elsewhere are not precise, and there is a range of uncertainty around the figures. There is no official source with "the right number". For the time being, we continue to use the IEA's capacity estimates; however, we note that we are in the process of reviewing our capacity estimates for OPEC countries.

Brent price range for Scenario 2: $125-150/bbl

Bullish factor: Saudi spare capacity declines to almost zero.

Offsetting bearish factors: yes, they increasingly start to come into play. In this scenario, with prices reaching the highs seen in July 2008, there would be significant downgrades to global GDP growth and to global oil demand growth. The "demand destruction" would be focused on the US, as was the case in 2007 and H1 2008. Because of the low tax burden on end-users in the US, consumers and businesses quickly feel the full brunt of higher market prices.

Another key bearish factor would come into play. In this scenario, there is a good chance of a release of IEA emergency strategic reserves, with the probability increasing as Saudi spare capacity dwindles. See the chart above for the maximum drawdown rates of IEA strategic crude and product reserves.

Geopolitical Scenario 3: Unrest spreads to Saudi Arabia and threatens Saudi crude exports and any remaining spare capacity. Brent price range of $150-200/bbl.

In this most extreme, worst-case scenario for the oil markets, serious unrest spreads to Saudi Arabia. In this case, it does not really matter if Libya or any other producers are shut down or not.

Saudi Arabia is OPEC's biggest producer and the world's biggest current holder of spare capacity. If production and exports are affected, or even perceived to be seriously threatened, the impact on the oil markets would be dramatic, to say the least.

As with Scenario 2, we must emphasize that we consider serious Saudi unrest or a Saudi disruption a very low probability
scenario. We include it here because, in the current tense environment in MENA, and with severe and occasionally violent protest ongoing in Bahrain, Saudi Arabia's neighbor, oil market participants are discussing "what if the worst-case actually happens"? Again, we will leave the geopolitical analysis of this country for another time. Here, we simply try to estimate broad price ranges and key market dynamics.

Brent price range for Scenario 3: $150-200/bbl

Bullish factor: Saudi production and exports are reduced or are under perceived imminent threat, and any spare capacity is
rendered irrelevant.

Offsetting bearish factors: yes, they become major drivers in the oil markets. The higher the price spike, the more important they become. In this scenario, there would be large downgrades to global GDP growth and large downgrades to global oil demand growth ("demand destruction").

In this scenario, there is an absolute certainty of a release of IEA emergency strategic reserves. In addition, IEA "demand side management" measures, such as fuel rationing, would probably be imposed, as part of a full-fledged emergency response mechanism.


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Snidley Whipsnae's picture

Between $110 - $220??? That's what I call a BIG target...

schoolsout's picture

Put 350 gallons in the boat this past weekend...Diesel at the marina was only $3.38/gal

Thought it would be much worse...hopefully, we'll get one or two trips offshore in before the coming storm in oil really takes hold

French Frog's picture

that's not a target, that's just a wild guess with as broad a margin of error as possible just to make sure that all bases are covered so in 6 months time (or less) the writer can say "see... i told you so";

by its own definition, a target is "a reference point to shoot/aim at" and should be concise, not vague

financeguru500's picture

Here are my 3 scenarios for oil.

1) it goes down in price.

2) it stays the same.

3) it goes up in price.

Now prove me wrong. lol

CrashisOptimistic's picture

It's somewhat odd that these analyses ignore that:

1) Oil hit 147 in 2008 without any of these "Mideast turmoil" stories

2) Oil has been above $90 in 3 of the last 4 years without any of these "Mideast turmoil" stories.

3) And hell, let's make that above $105 in 2 of the last 4 without any of these "Mideast turmoil" stories


Internet Tough Guy's picture

These reports are junk; no one can predict this fluid situation or market reaction.

RobotTrader's picture


The next credit crisis could send oil back down to $35 within 6 months, easy.

With the outlandish leverage being used right now by the hedge funds, if this market cracks like it did in 2008, crude will get decimated.

Long-John-Silver's picture

Second dip hits any moment now. Jobs go in the crapper, oil hits $30, and Obama runs back to Kenya.

pslater's picture

"...and Obama runs back to Kenya".

Let us pray.

william the bastard's picture

QE ends abruptly (sooner than June) as a salute to gas prices, SPX goes in crapper, PMs go in crapper, Obama runs back to Chicago to hand out pipes to crack heads.

Internet Tough Guy's picture

From the junk predictor himself:

Gold brutalized, down $10 already from its highs
RobotTrader - Mon, Mar 7, 2011 - 09:39 AM

Here comes he Cartel with its "Midnight Massacre"

Probably a key outside reversal day for the CRB Index




Hulk's picture

"big leak in the gulf proves there is no such thing as peak oil" my fav robo quote...

DaveyJones's picture

Pure genius. I mean, all we need are more disasters to divert one.

AbandonShip's picture

Credit Crisis?  Who you kidding? Haven't the CBankers proven they will do ANYTHING to prevent another credit crisis?  They'll sacrifice everything to make sure banks stay alive.

redrob25's picture

Outlandish leverage?


Let me guess, you were educated at Princeton, recruited by one of the big banks, and after the initial downturn, they told you that to keep your job, you had to run a bunch of bulletin board accounts under different accounts telling everyone nothing is wrong. What do they pay you a month? 5-6 grand?

Snidley Whipsnae's picture

And as usual they left out a black swan scenario... What if Hezbollah and Israel decide to have another go at each other? What if a small space rock lands in downtown Saudi Arabia? What if a tanker dies and sinks of natural rust in the Straits of Hormuz?

Too many variables to imagine them all...

Drachma's picture

I think the price of oil has less to do with the Middle East and more to do with gold. $200 oil quite possible in that respect.

Flakmeister's picture

We are at the tipping point based on effect of historical oil spikes. The higher oil spikes, the harder the economic fall. Unlike Au, oil spikes are highly deflationary.

Recommend very short term trades only or aquiring US/Cdn oil assets for a long term play.

Flakmeister's picture

+1 see my reply to your post below... tag, you are it!

Seasmoke's picture

why not $221 ???

locinvestor's picture

Here's another angle. Some reports say the States are trying to get Saudi Arabia to supply the Libyan rebels with arms (to do our work for us?). If that's true OR if Obama was stupid enough to acutally let one of our soldiers get killed there, how would that play into this?

Based on what's happened so far in Iraq and Afghanistan, my prediction is nothing would happen. Some like Stephen Lendman are saying that MSM outlets like the NYT are effectively govt. propaganda outlets. Which in many ways is true.

Is it once again a matter of out-of-sight-out-of-mind? I'm too busy trying to keep my home. What the fuck do I care about Libya? Acutually, you should give a shit.

Robslob's picture

or just stay i cash until everything blows up like last time...although in reality...2008 was probably a "worldwide bankers dry run" on how to completely fuck everyone on the planet...

Guns, ammo, soldiers, gold, silver, food, water and clean burning natural gas bitches.

Stroke's picture

Looking forward to the"Day of Rage"....lawn-chair & popcorn ready

AbandonShip's picture

If SGen is right, this will kill the airline industry (especially those with unhedged fuel costs).  Anyone notice the recent ticket price hike?

Why don't these politicians & central bankers see that inflationary monetary policies will crush petro-chemical based economies?

Flakmeister's picture

The inflationary policies are only exacerbating the underlying tend.

Net oil exports, i.e. the oil on the market, is down ~5% since 2005

The overall energy content of what we call "oil" has been flat since 2005 despite modest increases in production rates.   (figure 6)


If you read this, it will also give insight into what happened in Egypt. To futher illustrate this, go to

Select Egypt.  You may want to play around with other countries to get a feel for what is going on.

AbandonShip's picture

So in addition our fresher oil has a downtrend in energy yield.  Excellent! Can't we just print more of it?  Works for debt.

Flakmeister's picture

  No, not fresher, just a changing composition of what is called oil...

Thermodynamics is a cruel heartless bitch...

DaveyJones's picture

not sure our grandkids will ever fly on an airplane 

bankonzhongguo's picture

Just saw protesters in Kuwait starting up against the government.  Nice.

You can't tell what is actionable information anymore from what is market pumping dis-information.  Which means everyone is on their own.

No real newz out of Bahrain either.

Is the House of Saud in da house?

CrashisOptimistic's picture

There is no actionable information.  Oil is not about markets.  It's about death.

TideFighter's picture

The Saudi Arabia National Guard (SANG) is already on full military alert and began building "pre-battle" inventories of ammo, food, and fuel. I have two very close friends in SA, one who has just completed a major SANG order for provisions. SANG was one of the first on the scene in the Gulf war.

"Units include 3 Mechanized Brigades; 6 Infantry Brigades; 2 Separate Battalions; Security Force to include a Special Brigade, Special Security Battalions, Military Police Battalions and two Guard Battalions; Headquarters and Regional Signal Units; Regional Logistics Base Commands; one Engineer Battalion; Medical to include Military Field Medical Command, King Fahd Hospital, Falcon Peninsula Hospital, and Regional Medical Units"



economists_do_it_with_models's picture

Perfect storm right now between QE2 ending/no QE3 and things calming down in the Middle East for the dollar to strengthen and oil to drop.  Energy stocks like COP & MRO are very overbought in my humble opinion.

web bot's picture

I think you're right.

What's your view on PMs, especially silver?

Shoegazer's picture

There's no way in hell I'm betting money against QE3.  I don't see Benny telling the banks and treasury that he's closing the free money tap.

CrashisOptimistic's picture

It's not about markets.  Oil won't even be traded publicly in a few years.  Most oil long term contracts are now non public.

Oil is the alpha asset of civilization.  Life at the 6.8 billion level depends on it.  It is one of very, very few that disappears entirely with use.  It's not infinite.  The planet's volume is not infinite so it cannot be.

Therefore it has to be gone or all but gone sometime.  Whenever that time is, rest assured there will be a majority who deny that time has arrived.

FrankIvy's picture

I've always thought that somewhere between 200 and 300 a barrel the .gov steps in to the oil market, ending public trading in the U.S..

flattrader's picture


>>>Most oil long term contracts are now non public.<<<

Could you elaborate?

I am assuming you mean direct contracts with producers/suppliers like BP.

Or are you talking about something different?

Thanks in advance.


Flakmeister's picture

So called sovereign deals. Google up the relationship between Venezuela and China. That is one I am definately aware of. Oil that would otherwise be on the free market is tied up in quid pro quo or fixed contract price deals. I believe, but may be mistaken, a similar relationship exists between China and Iran.

Edit: I should add these sovereign deals are part of net exports discussed above, but the oil is not on the open market.

earlthepearl's picture

Do you think contract expriations in a few weeks will cause a pull-back

is some of the Oil future ETFs a la USO?


I just closed out some call options on this ratioanlization, but now i think I just had a

shaky hand


FrankIvy's picture

Have conviction because you've done your due diligence, follow through, never second guess.

baby_BLYTHE's picture

On Morning Joe today former Senator Judd Gregg along with former Presidential canidate and White HOuse avidisor under Ford, Nixon and Reagan- Patrick James Buchanan

...said a "collapse of the dollar= near certainty" and that US Foreign Policy would soon "change completely".

Who is telling the truth, folks?

I don't want to be caught with my pants down if I can help it! I am scared!

People's lives are being messsed with!

FrankIvy's picture

Any Saudi issues means +200, no questions asked.  Everything is hanging on by a thread.  KSA having riots and or a couple of pipeline attacks sends oil booming, because, if you don't have your contracts set when the KSA is forced to cut exports by 25%, you may not get any oil.  Oil at 220 is much better than no oil.

Atomizer's picture

Going back to Early 2008, we bottomed at 69.69. Still have a little wiggle room.


r101958's picture

Since 11am somebody has been buying dollars. Taking down gold, silver and oil. Not for long me thinks.

10kby2k's picture

Was that Larry Kudlow arguing for the end of QE2 and/or a rate hike to achieve a stronger dollar on  CNBC to lower oil and all commodity prices?  And he got no opposition.....even from Liesman (who said $4/gas was the freak out price). Or was I hallucinating and/or flashback.

Scorpio69er's picture

re: "Geopolitical Scenario 3: Unrest spreads to Saudi Arabia"


Saudis mobilise thousands of troops to quell growing revolt

Saudi Arabia was yesterday drafting up to 10,000 security personnel into its north-eastern Shia Muslim provinces, clogging the highways into Dammam and other cities with busloads of troops in fear of next week's "day of rage" by what is now called the "Hunayn Revolution".