In David Greely's note which we noted earlier, in addition to debunking speculation that OPEC has much if any spare excess capacity, confirming Jim Rogers' point from a week earlier, he observes that more than half of the country's oil infrastructure may already be in the hands of rebels. Whether this will merely reinforce Gaddafi's resolve to let everything burn in his wake is still unknown - repeated rumors that he is seeking to hand over power peacefully have so far been squashed, as the offensive against rebels accelerates. In the meantime Reuters reports that European oil imports are about to get very complicated, making life for Italy, which is most reliant on Libyan oil, quite complicated: "Libyan oil trade has been paralysed as banks decline to clear payments in dollars due to U.S. sanctions, trading sources told Reuters on Tuesday. The move follows a decision by major U.S. oil firms to halt trade with Libya and will complicate deals for European firms to buy Libyan oil. Around half of Libya's oil output, or more than 1 percent of global supply, has already been choked off by lethal clashes between rebels and forces loyal to Libyan leader Muammar Gaddafi. . Oil prices hit their highest levels since September 2008 on Monday." We anticipate that NATO forces with GCC backing, will find a way to institute a no fly zone to prevent an all out "Saddam" response which could see all the oil holdings in rebel hands be destroyed in retribution by the Gaddafi regime, which we are skeptical will result in dropping oil prices.
From Goldman's Greely:
Based on company reports, we estimate that close to 1 million b/d of the total Libyan production capacity of around 1.6 million b/d is currently either shut-in or cannot be exported. Assuming that all oil fields and export terminals controlled by the opposition are currently offline, the disruptions could be larger than our current estimates (Exhibit 2). However, given the unstable situation in the country, it is sometimes very difficult to determine who actually controls the asset. We have seen conflicting reports in which both the government and the opposing forces claim control over the same ports and fields.
The market has also become increasingly concerned about further contagion in the region. While we continue to believe that it is unlikely that the turmoil will spread to the richer and politically more stable GCC countries, there are a number of economies with similar traits to Libya that could be susceptible to further contagion, namely Algeria, Syria and in the extreme maybe even Iran. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries?
And more from Reuters on the complete halt in oil trading which threatens to send European gasoline prices to all time records:
Banks don't want to finance the system in Libya, so for the moment no one is getting money for oil. There are big problems for payments," said a senior trader with a European oil company.
Sources at or close to major European buyers of Libyan crude, including Italy's Eni and Saras, said the decision by banks to stop export financing of Libyan crude had virtually brought all transactions to a halt.
"It's not a matter of choice, there is an embargo on U.S. dollars coming in and out of Libya," said a trader with one of the firms, referring to banks' resistance to clear payments in the U.S. currency.
"All U.S. dollar transactions are being blocked," the trader said, adding it was not clear at this stage if payments were possible in other currencies.
Western countries, the European Union and United Nations have imposed sanctions on Libya and frozen government assets in response to forces loyal to Gaddafi firing on protesters.
"Sometimes it is easier not to trade at all than to trade with many caveats," said an oil trader working for a major international bank, adding longer-term EU law interpretations could reopen some paths for trade.
"If you can prove that money from oil purchased goes back to accounts not controlled by Gadaffi and family, perhaps you could argue that you are buying oil for humanitarian purposes and that the money would flow back into the country," he said.