Saturday, February 26, 2011

Saudi Help Ignores the 'Gravity' of the Oil Crisis

Saudi Help Ignores the 'Gravity' of the Oil Crisis

Saudi Arabia's ride to the rescue of global oil markets may be hobbled at birth.

The kingdom may have plenty of spare production capacity, but its oil isn't as high quality as Libya's. So while Saudi willingness to ramp up output has taken the froth off headline oil prices, a full reversal of the sharp rise this week is contingent on a more settled outlook for Libya.

On paper, Saudi Arabia can replace lost Libyan supply. Its 3.5 million barrels a day of spare capacity at the end of January is far more than Libya's daily production of 1.6 million barrels. But Libya's oil is sweeter and less sulphurous than that produced by the Saudis. Refiners prefer higher-grade crude as processing it into gasoline and other products is less complex. As Libya exports the bulk of its oil output, primarily to southern Europe, refiners that can't process heavier Saudi crude will need to find replacement supplies.
Similar-quality crude can be found, notably in West Africa and the North Sea. But these areas may struggle to ramp up production; combined spare capacity in Angola and Nigeria was just 450,000 barrels a day at the end of January, according to the International Energy Agency. The relative scarcity of high-quality oil is widening the price differential between higher-grade crude and heavier oils. The spread between North Sea Brent and Russian Urals crude has widened 32% in two weeks.
Since higher-grade crude prices feed into the benchmark Brent futures price, headline oil prices likely will remain high despite the Saudi willingness to intervene. Reports of production outages in Libya also will keep markets volatile as the supply situation tightens. Near term, refiners can survive by running down inventories, while upgrades in recent years mean more European refineries can process heavier oils these days.
Still, absent a calmer situation in Libya, the 8.7% rise in Brent futures to above $111 a barrel this week likely will stick.
Write to Andrew Peaple at

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