As the violence in important oil-exporter Libya continues to escalate, edging ever closer to a full blown civil war, on the oil market scene there is talk about oil reaching US$200 a barrel, according to a report released by Societe Generale on Monday.
Libya has seen both production and exports decline in recent weeks. Against this backdrop, over the past week, very volatile markets have seen front-month prices for Brent crude oil trade around $116/bbl whilst NYMEX WTI prices have trended higher, moving from $98 a week ago to $105.
In arriving at the $150-$200 a barrel range, the European bank set out an extreme scenario whereby Saudi Arabia, the world’s biggest oil producer and the holder of the biggest spare crude production capacity – currently around 3.5 million bpd according to the country’s oil minister – drastically reduces its production and export capacity due to even a “perceived imminent threat” spilling over from elsewhere in the region.
It added that the question of Saudi Arabia even having any spare production capacity left would be an academic one if this were the case. It did however emphasise that this was purely hypothetical. The anti-government unrest in neighbouring Bahrain is definitely putting the oil producing giant on tenterhooks, Societe Generale even referred to ‘oil market participants’ who are entertaining the idea of this worst-case scenario.
As things stand however financial institution’s report said the current geopolitical scenario being played out is the one in Libya where production has dropped by 1 million bpd (or “shut-in”) from the normal 1.65 million bpd in addition to the widespread unrest in the Middle East and North Africa. It predicts that Brent crude’s price range to be $110-125/bbl under such circumstances.
The report which is mainly concerned about the oil fields themselves does say that even if the Libyan crisis ends, “prices would fall, but not all the way to the pre-Egypt levels of $95-100 for Brent, and not all at once. Prices would decline gradually, as flows are restored. However, the wider MENA unrest would still cause a residual risk premium in oil prices of perhaps $5.”
