Oil – bubbles and troubles
Charles Whall, global oil and gas analyst at Newton Investment Management, looks at the escalating unrest across North Africa and the Middle East, and the likely effects of the turmoil on the oil price.
“The widespread unrest in Libya is currently dominating headlines. Popular unrest in such an oil-rich region inevitably has its consequences for oil production, and the past few weeks has seen production in Libya all but cease, while production in Egypt has also been affected – although to a much lesser extent given that its regime change was for the most part peaceful.” He continues, “Such uncertainty has triggered a spike in the oil price, and the direction that the oil price takes now depends much on whether oil supply disruption and regime change is constrained to North Africa, or spreads elsewhere in the Middle East.
“Saudi Arabia, the world’s largest oil exporter, remains the only oil producing nation with significant spare capacity; we estimate at around three million barrels/day, which is more than sufficient to compensate for losses from Libya and Egypt in the short term,” Whall explains. “The Saudi Minister of Petroleum and Mineral Resources, Al- Naimi, has now given assurances that extra oil will be put on the market, and this has taken some pressure off the oil price, for now at least,” he adds.
“The world relies upon oil, and it therefore relies upon stability across the major oil exporting region,” says Whall. “Any significant disruption in Saudi Arabia is likely to lead to oil prices ramping rapidly towards the US$200/barrel mark, and stalling the already fragile global economic recovery,” he adds. “This has to be avoided, and in all likelihood will be. However, we are in very fragile times, with huge vulnerabilities to unforeseen events. As such, we expect to see the oil price remaining high, retaining a premium to reflect this uncertainty.”
“While the level of this ‘uncertainty premium’ will vary with the escalation or dampening of production instability, the underlying picture is not good. We were already expecting the level of global spare capacity to start tightening significantly by the end of 2012, so the underlying oil price will inevitably rise further on more fundamental issues. Projects in the Middle East and North Africa are likely to be delayed, so the major oil consumers need to be realistic and tackle the issue of their over-reliance on oil as a matter of urgency.” He concludes, “This provides an investment backdrop that will not be easy, but which can be very positive if approached correctly.”
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