Replies to post #2135 on The Rising Influence of Rising Affluence

[bladerunner1717]

Oakes,

What if the turmoil spreads to Saudi Arabia?


Here's Rosenberg's take on the situation:



Global equity markets are selling off quite sharply and oil prices soaring amid
the political turmoil in Libya — at one point overnight, WTI hit a two-year high of
$98.48/bbl and was up 10%. The fact that equities are sliding amid the
geopolitical tensions in the Middle East and North Africa is a classic signpost of
an overbought and overextended market that was ripe for a corrective phase.
And the fact that WTI has risen to near $100 a barrel (and trading at a historical
discount to Brent — so reliance just on light sweet crude may be misleading
because oil costs globally have risen to much more onerous levels) despite the
fact that Libya produces just 2% of the world’s supply and is the number 8
producer within OPEC (it exports 1.5 mbd) is an additional sign of just how tight
global crude supplies are.
The risk that the turmoil in the Arab states spreads further could very easily
touch off further gyrations and upward pressure on energy prices, especially with
Chinese demand showing no sign of abating … yet. After all, pricing in Libya
supply disruptions is one thing but what if this social unrest spreads to Saudi
Arabia, which holds 20% of the world’s oil? If Libya can spark a $10/bbl
response, imagine what a similar uprising in Saudi Arabia could unleash. Do the
math: we’d be talking about $200 oil (as dictatorships/ruling elites come under
assault, one can’t help but think if it is possible that the turmoil could ever
spread to China — see China Cracks Down on Web Amid Unrest on page A8 on
today’s WSJ and have a good look at Beijing and the Arab Revolt on page A13).
If equity risk premia do not manage to rise in this environment then we most
certainly are in a total new era — of complacency.
As it stands, even $100 a barrel is a dead weight drag on cycle-high profit
margins and discretionary consumer spending. Remember when oil first reached
the $100 mark in March 2008 the unemployment rate was 5%, not 9%, and
fiscal policy was about to be loosened in a dramatic fashion, not tightened. The
Fed had 300 basis points of rate cuts in its chamber, not zero. And while the
impact will be felt in the real U.S. economic aggregates as a rising price deflator
cuts into real-side activity, the effects are even harsher in emerging markets,
who’s economies are far more energy-sensitive (and less energy efficient) than
is the case in the developed world.



Bladerunner

[DewDiligence]

Guilt by association? HES (80.76) was down 5% today despite the fact that its production in Libya is de minimis: about 20k boe/d from a JV where HES has an 8% equity interest. (HES does have significant reserves in Libya, but they are offshore and not yet in production.)

By comparison, CVX, which has no operations in Libya, finished 1.6% higher in trading today.

[bladerunner1717]

Oil prices soar on Libyan fears

http://www.nytimes.com/2011/02/23/business/global/23oil.html?_r=1&nl=todaysheadlines&emc=tha2


Oil Soars as Libyan Furor Shakes Markets
By CLIFFORD KRAUSS and CHRISTINE HAUSER
Published: February 22, 2011

HOUSTON — The political turmoil sweeping the Arab world drove oil prices sharply higher and stocks much lower on Tuesday despite efforts by Saudi Arabia to calm turbulent markets.




Americans are paying an average of $3.17 a gallon for regular gasoline, 6 cents more than last week. (Over $4.00 in parts of Southern California)


Mary Altaffer/Associated Press
Traders are paying more for oil.
The unrest that has spread from Tunisia to Libya pushed oil prices to a two-year high and has spurred an increase in gasoline prices. The specter of rising energy costs and accelerating inflation in turn unsettled investors.

Oil is now at a price not seen since the recession began, and it is more than $20 above goals set in recent months by Saudi officials as strong enough to satisfy the top producers but not so strong they might suffocate the global economic recovery.

Although there are still plentiful supplies of oil and gasoline in the United States and in much of the world, American consumers are now paying an average of $3.17 a gallon for regular gasoline, a steep rise of 6 cents a gallon over the last week, according to the AAA daily fuel gauge report. With consumers paying roughly 50 cents more a gallon than a year ago, analysts are warning that prices could easily top $3.50 by the summer driving season.

“Higher energy prices act like a tax on consumers, reducing the amount of discretionary purchasing power that they have,” said Lawrence R. Creatura, a portfolio manager at Federated Investors. “It represents an additional, potential headwind for retailers.”

Those concerns helped send the Dow Jones industrial average down 178.46 points, or 1.44 percent, to 12,212.79. The broader Standard & Poor’s 500-stock index declined 27.57 points, or 2.05 percent, to 1,315.44, while the Nasdaq composite index lost 77.53 points, or 2.74 percent, to 2,756.42. Markets in Asia and Europe were also lower. Treasury prices rose in the United States.

Saudi Arabia’s oil minister sought to reassure the markets on Tuesday, saying that OPEC was ready to pump more oil to compensate for any decline. At least 50,000 barrels a day of output has already been halted in Libya. That is only a fraction of the country’s production, but with foreign oil companies beginning to shut down operations and evacuate workers and with local ports closing, more output could be lost.

“OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, said at a news conference after a meeting of ministers of oil producing and consuming nations in Riyadh, Saudi Arabia. “There is concern and fear, but there is no shortage.”

Europe appears most immediately vulnerable to the strife in Libya, which produces almost 2 percent of the world’s oil. More than 85 percent of its exports go to Europe; more than a third goes to Italy alone. Libya sends only a small fraction of its oil to the United States, but because oil is a world commodity, Americans are not immune to the price shock waves.

In New York, crude oil for March delivery gained $7.37, or 8.6 percent, to $93.57 a barrel, while oil for April delivery rose 6.4 percent, to $95.42 a barrel. Brent crude, a European benchmark traded in London, rose 4 cents, to $105.78. Refineries on the East and West Coasts also depend on Brent crude, meaning that the higher prices paid by Europeans are also pushing up gasoline and heating oil prices paid by many New Yorkers, New Englanders and other Americans.

Tom Kloza, the chief oil analyst at the Oil Price Information Service, estimated that the Saudis could pump an additional 1 million to 1.5 million barrels in a matter of days. As the largest producer, Saudi Arabia is by far the most influential member of the Organization of the Petroleum Exporting Countries, with a reserve capacity to deliver an additional four million to five million barrels to the world markets after several weeks of preparation. That is more than twice the oil that world markets would lose if production were halted completely by unrest in Libya.

“Unless this unrest spreads to the streets of Jeddah and Riyadh,” Mr. Kloza said, “I think it’s a very manageable situation and prices are closer to cresting than they are to exploding higher.”

While Libya has been the immediate cause for the spike in oil prices recently, oil experts said traders were driving up prices because of concerns that a long period of instability in the Middle East was just beginning. They identified the protests in Bahrain in particular as a disturbing sign that neighboring Saudi Arabia might not be immune to the spreading political contagion.

Bahrain produces little oil, but it is connected to the oil-rich eastern region of Saudi Arabia by a 15-mile causeway. The island nation has a majority Shiite population with cultural and religious ties to the Saudi Shiite minority that lives close to some of the richest Saudi oil fields.

Saudi rulers have long feared that its regional rival, Iran, could try to destabilize Bahrain as a way to cause trouble for the Saudi royal family. Iran’s intentions became all the more worrisome to the Saudis when it decided this month to send two warships through the Suez Canal for the first time in more than 30 years.

“No one knows where this ends,” said Helima L. Croft, a director and senior geopolitical strategist at Barclays Capital. “A couple of weeks ago it was Tunisia and Egypt, and it was thought this can be contained to North Africa and the resource-poor Middle East countries. But now with protests in Bahrain, that’s the heart of the gulf, and it’s adding to anxieties.”

Middle Eastern oil fields are generally well defended and far from population centers, but energy analysts say the continuing turbulence potentially threatens supply lines and foreign investment that producers like Libya and Algeria depend on to increase production.

World oil prices started rising sharply when demonstrators overwhelmed downtown Cairo earlier in the month because of concerns that unrest could block the Suez Canal and Sumed pipeline through which three million barrels of crude pass daily. Labor unrest continues to roil the canal, though shipments have continued without incident.

Unrest in Yemen potentially threatens the 18-mile-wide Strait of Bab el-Mandeb, a shipping lane between the Horn of Africa and the Middle East that serves as a strategic link between the Indian Ocean and Mediterranean through which nearly four million barrels of oil pass daily. Security for tanker traffic in the area became a concern after terrorists attacked a French tanker off the coast of Yemen in 2002.


Bladerunner