North African Turmoil Could Push Oil to $220/Barrel (NMR)

Not even a promise from Saudi Arabia’s oil minister to make up any production shortage caused by the unrest in Libya and Algeria is enough to hold down the rise in crude oil futures. WTI crude for April delivery has risen to more than $97/barrel, its highest level in more than two years. Brent crude is above $110/barrel.

Adding fuel to the skyrocketing price is a prediction from Nomura Holdings Inc. (NYSE: NMR) that crude prices could hit $220/barrel if exports from Algeria and Libya are halted. The two countries combined produce about 2.9 million barrels of oil a day, of which about 1.3 million barrels/day are Libyan oil and 1.6 million barrels/day are Algerian oil.

The Saudis theorectically can ramp up spare capacity production in about a month to meet a stoppage of exports from Libya. It is not clear if an Algerian halt could also be met. In any event, it would take longer than a month to get that much spare capacity back on line.

And that’s if OPEC, and Saudi Arabia in particular, have the spare capacity they claim. OPEC has said that it now has about 5 million barrels/day in spare capacity. If that were true, and the cartel was happy with prices in the $70-$80 range, why didn’t OPEC at least threaten to raise production when Brent hit $100/barrel?

Nomura’s estimate is surely based on a skeptical reading of OPEC’s ability to put its nominal spare capacity back into production. Another factor is the large number of speculative investors who may move back into the crude futures market. These investors are nearly uniformly long, adding more demand to an already under-supplied market for crude futures.

A compounding problem is that Saudi crude is not an even exchange for the light, sweet Libyan crude. The heavier, more sulfurous Saudi crude can’t be used in refineries that are set up for Libyan crude. Crude may be fungible, but getting the right grade of crude to the right place takes some doing.

The big worry now should be what will happen if Gaddafi loses control of Libya. If he makes good on a promise to leave the country in ruins, the impact of the loss of Libyan oil could be long and severe. If, however, he loses control and leaves reasonably peacefully without damaging the country’s petroleum infrastructure, crude production could resume fairly quickly.

Paul Ausick