High Oil Prices Unlikely To Go Away Anytime Soon

Oil prices are moving higher today, due largely to news about Libya and OPEC. Algerian Oil Minister said that there was no shortage in the global oil markets and that an emergency OPEC meeting is not needed now. It also appears that optimism over a quick resolution to fighting in Libya was overdone, and that rather than make overtures for a peace deal, Qaddafi forces continue to do battle with the opposition. However, it appears shipments out of Libya have slowed significantly. IEA estimates that Libyan oil production has fallen by as much as 1 mln bbl/day, though limited exports are continuing from some Libyan ports. Qatar Oil Minister said that OPEC and non-OPEC producers have already boosted output to make up for any shortfalls. However, Libyan oil is particularly light (low density) and sweet (low sulfur), and so it’s not just a matter of replacing the number of barrels of oil. Rather, refineries that are geared for Libyan oil must find replacement oil that’s similar in physical characteristics. Light, sweet oil is highly valued because it yields a high proportion of gas and diesel fuel. That’s why Saudi Oil Minister today said that his country is developing a light, sweet blend that’s similar to Libya’s.

Last OPEC meeting was in Ecuador back in December, and though another “Ordinary” meeting is not scheduled until June 8 in Vienna, we expect continued high oil prices are likely to lead to an “Extraordinary” meeting before that, despite current official efforts to downplay the event. There was an interesting NYT story this week about Russia, which is benefitting greatly from higher oil prices. However, it noted that Russia is pumping at full capacity now and so cannot be counted on to boost output in the event of a serious global shortage. As we noted last month, Saudi Arabia currently has excess capacity of around 3 mln bbl/day, which could cover Libya’s pre-crisis daily output of 1.6 mln bbl. As a whole, OPEC is estimated to have excess capacity of around 5.4 mln bbl/day (5.2 mln ex-Libya). However, much of the added production cannot be accessed immediately and could take several weeks to come online. OPEC members with the next biggest excess capacity are Nigeria and Angola (each with an estimated 400k bbl/day excess), followed by Kuwait with 350k and UAE with 300k. The other big producer facing substantial unrest is Iran, whose daily output of 3.7 mln bbl would be very, very difficult for OPEC to cover if its production were also to be disrupted.

Bottom line: high oil prices aren’t going away anytime soon, and it will have differing impacts on EM. We noted recently that many countries in Latin America have sizable oil reserves and are net oil exporters, including Argentina, Brazil, Colombia, and Mexico to go along with OPEC members Ecuador and Venezuela. As such, high oil prices are a net benefit for many of the major Latin American economies. Asia remains the most vulnerable in EM to a protracted spike in energy prices, as does Eastern Europe.

Source: Bloomberg