Luce Energy on the Libyan Unrest and its Oil Supply

Reports suggest companies have already shut down onshore production, and Luce Energy analysts estimates as much as 1.2m barrels a day could have been halted. End Quote

(1888PressRelease) May 26, 2011 - Oil prices are edging up again as the tensions in Libya continue, and analysts at Luce Energy believe supplies from the country could be disrupted for months. In fact it could be the eighth largest supply shock since 1950.

Reports suggest companies have already shut down onshore production, and Luce Energy analysts estimates as much as 1.2m barrels a day could have been halted. With the oil infrastructure on the east side of the country, it could be prone to attacks from opposition forces or those loyal to Colonel Gaddafi. Admittedly, other suppliers such as Saudi Arabia are talking about making up the shortfall, but this can't go on indefinitely.

With Libya basically in a state of a civil war, there are reasons to believe that oil supplies in that country could be off for months. But more worryingly, Libya comes after leaders in Egypt and Tunisia surrendered their power, creating the impression of a domino effect for Arab leaders. With many large Middle East oil exporters scoring highly on social discontent, the risk of continued tensions in the region and an eventual oil supply loss remains elevated.

Luce Energy thinks that the Libyan disruption is particularly important for three reasons:
- First, Libya is the 13th largest crude oil exporter in the world.
- Second, the country is a very large producer of light sweet blends, a quality of crude easily turned into transportation fuels.
- Third, the Libya supply disruption could be the 8th largest supply shock since 1950, on our estimates.

Beyond the physical disruption issues, real interest rates keep on sinking into negative territory in many countries. Central banks seem unwilling to quickly hike short-term interest rates to slow down aggregate demand. In our view, the cocktail of further increases in oil consumption and a severe supply shock makes a spike and crash scenario more likely for global oil prices.

Broadly, we would argue that a 10% increase in oil prices pushes down global oil demand by about 0.5%. In other words, a 600 thousand barrels a day production disruption should impact Brent crude oil prices by about 15% or $15 a barrel.

Worryingly, it highlights the risk of further price rises if more production is shut in. As prices spike, natural stabilizers such as strategic petroleum reserves and OPEC spare productive capacity become extremely important tools to balance the market. For the OECD as a whole, strategic oil reserves amount to 1.6bn barrels. Also, Saudi Arabia and other OPEC countries have substantial spare capacity. However, OPEC's spare capacity and OECD Strategic Reserves boast mostly medium sour crude, suggesting that gasoline-rich light sweet barrels will remain in short supply.

Perhaps the more relevant point here is that OPEC's total spare capacity is now down substantially. Thus, the oil market's ability to deal with further sprouts of unrest in the Middle East remains limited. We now see substantial upside risks to Brent oil prices over the next few months.

Luce Energy:
Luce Energy was founded in 2007 and today is one of the leading privately held independent energy companies. Luce Energy, its subsidiaries and affiliated entities, engage in oil and gas exploration and production activities mainly in the Middle East region. In addition, Luce Energy is integrally involved in the start-up of major liquefied natural gas projects in Yemen.

Press Information:
Mahmoud Al Alawi
Press Coordinator - Luce Energy
press ( @ ) luceenergy dot com

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