Apart from the prospect of $220 a barrel…
Much discussion on Wednesday of whether Opec could pump more oil from the Arabian peninsula to make up for Libya going offline — so we thought these pointers from Barclays Capital’s Amrita Sen might help:
Firstly, the grades and quality of crude available from Saudi Arabia [are] likely to be different from Libya. For instance, the volume-weighted average of Libyan grades would have an API of around 37-38, while the current shut in Saudi production is biased towards medium crude. Moreover, Libyan crude is sweeter…
Prompt Brent markets have also flipped into slight backwardation, a trend we expect to continue in the short term, if sourcing immediate supplies is the concern. Moreover, the time taken to bring those Saudi barrels to the market is likely to be significantly longer compared to the ongoing Libyan production. Thus, the concept of a barrel for barrel replacement is not a correct one.
The issue of Saudi delay (which itself also has a political dimension) is another chink in the idea that spare production capacity = prompt and well-located supply. Gregor MacDonald has given the idea a name, Spare Capacity Theory, in an outstanding post:
Spare Capacity Theory: the assumption among western bankers, policy makers, economists, and stock markets that OPEC producers can lift oil production at will, and, export all of that spare production to world consumers.
Something of a generous assumption at the moment, to be sure.