Bloomberg News

OPEC Risks Bear Market as Libyan Output Recovers: Energy Markets

October 05, 2011

Oct. 5 (Bloomberg) -- The decline in OPEC’s oil below $100 a barrel for the first time since February is raising the likelihood the group will cut production, as Libya revives output and the global economic recovery falters.

The Organization of Petroleum Exporting Countries’ basket of crudes fell to $98.59 yesterday, down 18 percent from its highest level this year and within 2 percentage points of the 20 percent drop that’s deemed a bear market. Brent oil tumbled 21 percent from its April high and New York crude 34 percent.

Oil is sliding as the U.S., the world’s biggest energy consumer, shows signs it’s headed for a recession and Europe’s debt crisis deepens just as Total SA and Eni SpA resume Libyan production. OPEC, which supplies 40 percent of the world’s oil, will reduce output to prevent Brent falling below $90 because Middle East members are increasing spending, according to Barclays Plc and Deutsche Bank AG. Saudi Arabia, OPEC’s biggest member, boosted output five straight months this year.

“Saudi Arabia stepped up production to help compensate for the loss of Libya, and they will probably calibrate and go the other direction as production comes back,” Daniel Yergin, co- founder of IHS Cambridge Energy Research Associates and author of the 1991 Pulitzer-winning “The Prize: The Epic Quest for Oil, Money and Power,” said in a Sept. 21 interview in New York. “The impact of Libya will be determined by what’s happening in the overall global economy.”

Fighting Ebbs

Brent had its biggest monthly drop in September since May 2010 after Eni, Libya’s biggest foreign investor, resumed operations as the fighting to end Muammar Qaddafi’s 40-year rule ebbed. The holder of Africa’s largest reserves will pump 500,000 barrels a day by the end of this month, Nuri Berruien, chairman of state-run National Oil Corp., said Oct. 3. OPEC nations that raised output to replace the lost oil will cut back as the North African nation resumes exports, OPEC Secretary-General Abdalla el-Badri, a Libyan national, said Sept. 19.

Saudi Arabia, the world’s biggest crude exporter, produced 9.85 million barrels a day in August, the most since 1980 and 22 percent more than its quota, according to data compiled by Bloomberg. Output is likely to stay near record levels as long as U.S. and European economic woes don’t spread to emerging nations and Libyan exports are absorbed by rising global demand, an official from one OPEC member nation said Sept. 21.

‘Doom and Gloom’

“OPEC only has to worry if the doom and gloom come true and impacts oil demand as Libyan production comes back online,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington. “Some members will start to have problems if Brent falls to the low $90s.”

Brent futures nearest to delivery rose 2.5 percent, the first gain in four days, to $102.27 a barrel at 4:02 p.m. on the London-based ICE Futures Europe exchange. Crude advanced as much as 4.2 percent to $78.84 in electronic trading on the New York Mercantile Exchange.

Crude prices of $70 to $80 a barrel would be “fair” for producers and consumers, Saudi Oil Minister Ali al-Naimi said at a conference in Riyadh on Feb. 22. Now, OPEC won’t allow oil to fall below $90 because of the need for revenue to finance social spending, according to Barclays, Deutsche Bank, HSBC Holdings Plc, Societe Generale SA and the Centre for Global Energy Studies.

‘Iron Fist’

Gulf nations are spending $150 billion this year as they seek to damp public dissent, which led to the overthrow of rulers in Tunisia, Egypt and Libya. Saudi Arabia vowed to use “an iron fist” after 11 security forces were injured during unrest in a Shiite Muslim town in the oil-rich east on Oct. 3. OPEC is poised to earn a record $1 trillion from oil this year, according to the U.S. Energy Department.

Brent for delivery in 2012 is currently trading at $94.73, according to an average of monthly contracts for the year. That’s 17 percent less than the $114-a-barrel median of 37 analyst forecasts compiled by Bloomberg.

OPEC ministers will hold their second meeting of the year on Dec. 14 in Vienna to decide how much of their oil the world will need in 2012. Demand for OPEC crude will fall to 29.8 million barrels a day in the second quarter from 30.5 million for the rest of this year, according to the International Energy Agency. The group produced 30.3 million barrels a day in August, the Paris-based IEA said.

There are “dark clouds on the horizon which show a major downside risk” and oil imports by India and China are falling, Ali al-Yabhouni, the United Arab Emirates’ OPEC governor, said Oct. 3. Most developed nations are sliding back into a recession, while the U.S. is already in the throes of an economic contraction, Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, said Sept. 27 in New York.

‘Who Will Cut’

“Who will cut, and how, is for OPEC to decide,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA, said by phone from London Sept. 14. “The difficulty is balancing out demand versus supply uncertainty. Economic forecasts have been deteriorating, but you have supply-side uncertainty as to when Libya will return.”

Oil companies are returning to Libya after seven months of armed conflict between Qaddafi’s supporters and opponents halted 1.6 million barrels a day of production. Rome-based Eni said it may take more than a year to resume its full 280,000 barrel-a- day capacity. Petro-Canada’s joint venture with Libya’s National Oil Corp. expects to reach full output of 100,000 barrels a day by year-end, while Total said it will return to pre-war levels of 40,000 barrels a day “within a few weeks.”

A resumption of Libyan crude may lead to a narrowing in the premium of prompt Brent oil relative to future contracts, Seth Kleinman, a London-based analyst at Citigroup Inc., said in a Sept. 28 report. The December 2011 contract’s premium to December 2012, which was about $4 a barrel at that time, “looks like a sell in our view,” he said in the note to investors.

‘Much Uncertainty’

OPEC last met in June, when six members including Iran and Venezuela rejected a Saudi proposal to replace lost Libyan crude. Mohammad Aliabadi, Iran’s acting oil minister and OPEC president at the time, said before the meeting that the group saw “much uncertainty” in the world economy. Since then, Brent has dropped 14 percent.

“If anybody cuts it will be Saudi Arabia,” Kevin Norrish, managing director of commodities research at Barclays Capital, said in a Sept. 22 interview in London. “They need a breakeven oil price between $90 and $100 a barrel and that’s gone up a lot because of the extra money they’re spending to placate the unrest in their country.”

--With assistance from Robert Tuttle in Tripoli, Anthony DiPaola in Dubai, Christian Schmollinger and Mike Anderson in Singapore and Moming Zhou and Mark Shenk in New York. Editors: Raj Rajendran, John Buckley.

To contact the reporter on this story: Ayesha Daya in Dubai at adaya1@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus