February 22, 2011
Sheraz Mian
Director of Research
The turmoil in the Middle East has finally engulfed a major oil producer in the shape of Libya. The resulting uncertainty about oil supplies has pushed oil prices higher — a fresh headwind for the budding global economic recovery. In addition to the oil spike, a negative rating agency action on Japan and earthquake in New Zealand are expected to add to the unfavorable news flow for the stock market today.
The latest in the fast-unfolding Middle Eastern drama has taken a violent turn in Libya, a major oil producer and OPEC member, threatening the 40-year rule of its mercurial leader, Moammar Gaddhafi.
Eastern Libya has reportedly slipped out of the control of the government, from where roughly half of the country’s 1.7 million barrels a day in production comes. International oil companies are shutting down production and evacuating expatriate staff. This has put question marks over the roughly 2% of global oil supplies that come from Libya, the bulk of which heads to Europe.
The Libyan situation is the first real threat to oil supplies. But there is enough slack in the global oil complex to offset the Libyan barrels. OPEC has roughly 6 million barrels per day in excess production capacity, more than three times the Libyan capacity, that can be brought online promptly in exactly such a situation.
Most of the excess OPEC capacity is located in Saudi Arabia. An announcement from that nation willl go some way in calming down the oil markets. But no such announcement has been made yet.
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