A confusing picture at the moment on measures to address the Libyan supply shortfall in the short term — even as Gaddafi’s end seems to be nearing, at last.
And it really is the short term that matters for those exposed to Libya.
While the International Energy Agency insisted that European refiners had enough supply for a month and said coordinated action was unnecessary, Reuters reported that Saudi Arabia has quietly lifted daily output above 9m barrels. Separately, the ruling council based in Libya’s eastern city of Benghazi said that all oil terminals under anti-Gaddafi control were working, but with a 75 per cent shutdown.
Phew.
It might pay, then, to look again at the peculiarities of Libyan oil beyond brute capacity — in particular, the issue of replacing Libya’s good quality crude.
Olivier Jakob of Petromatix made an interesting point on Friday:
On the issue of the Saudi oil not matching the Libya oil quality; while it is mostly true we nonetheless want to point that the refining system being less stretched than in 2008 leaves a bit more flexibility in the system to work on the crude slate differential that would come out of Saudi oil replacing Libya oil. For example, Valero has restarted over the last few weeks its 235 mbpd refinery in Aruba that was shut in July 2009 and that is a refinery that runs on heavy and sour crude oil. Likewise the mega-refinery in Jamnagar India that started in 2009 is able to process all sorts of crude oil including heavy and sour crude oil. The global refining system is not as stretched as in 2008 and that should allow for a greater flexibility in the composition of the crude slates.
Nevertheless, it’s still clearly a tough environment in the very short term. The Italian oil refiner Saras said that Saudi supplies would not offer a substitute for the lack of Libyan sweet crude. Instead, it’s now seeking alternatives from Azerbaijan, Algeria and West Africa.
Refiners are scrambling to do this, of course, precisely because Libya was once so well-located vis-à-vis European markets — and it’s what makes reaction to the Saudis or the IEA so febrile.
Barclays Capital’s analysts put the situation well on Thursday:
The short-haul nature of Libyan export routes is critical… Had those routes been long-haul, then there would be more time for reflection about replacing the oil with other long-haul crude. However, in our view, attempting to replace short-haul crude with long-haul crude means that producers may need to be more assertive fairly quickly. Otherwise, there is a danger that often wild market interpretations of producer intentions and producer capabilities might become a further significant source of volatility in prices.
Sound points. BarCap also point out that the reduction in Libyan capacity already amounts to the overall drop in worldwide spare production capacity they’d been predicting throughout 2011.
The cushion of capacity will only decline from here. Needless to say, time required to restart full Libya production (assuming the Libyan people take their country back within days) — and the time that the region’s other authoritarian oil producers are running out of — shows that plenty of long-term disruptions lie ahead of us.
Related links:
Scrambling to swap Libyan oil for Saudi – FT Alphaville
Swinging on an oil VaR – FT Alphaville
Oil shock 2.0, or the benchmark wars – FT Alphaville