Oil Prices Spiking on Middle East Protests and Overthrows

Oil Futures are spiking due to Libya and the Middle East's March to Freedom. While food inflation is cited as an Egyptian revolutionary spark, for the United States it might just be oil.

Oil jumped to the highest in more than two years as violence intensified in Libya, stoking concern crude supplies will be disrupted as violence escalates around the Middle East and North Africa.

New York futures for April delivery rose as much as 9.8 percent from the close on Feb. 18, while London-traded Brent surged to the highest since September 2008, as soldiers deserted Libyan leader Muammar Qaddafi’s government and diplomats resigned. The country, holder of the largest crude reserves on the African continent, pumped 1.6 million barrels a day of oil in January, equivalent of about 8 percent of U.S. consumption.

“Oil is being bought on the risk that this contagion will spread through the Middle East,” Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, said by telephone today. “This effect is a knee-jerk reaction to the fact that this could spread.”

Crude for April delivery rose as high as $98.48 and was at $96.50 a barrel in electronic trading on the New York Mercantile Exchange at 11:37 a.m. Singapore time. It settled at $89.71 on Feb. 18. Floor trading was closed yesterday for the Presidents Day holiday and electronic trades will be booked today for settlement purposes.

Oil companies are preparing to evacuate as violence explodes in Libya and the violence is becoming increasingly horrific.

According to James Hamilton, Libya is 2.1% of world oil production, Algeria 2.5% and Iran is 4.7%. Saudi Arabia on the other hand, is 11.7% of the world's oil production.

Al Jazerra is reporting oil refineries would be a target if the violence in Libya escalates.

While oil production has only dropped by 50,000 barrels per day, according to International Energy Agency reports, Gaddafi's luck seems to be running dry.

"When you are using military force against protests in your capital, it shows how far it [has gone," said Peter Zeihan, vice president of analysis with Stratfor, a global intelligence company.

At least 61 people died in unrest on Monday, adding to several hundred who have been killed in recent protests. Two Libyan air force jets landed on the island of Malta on Monday night; their pilots claimed they defected after refusing to bomb anti-government protesters. Several Libyan diplomats have also defected, protesting attacks on protesters.

"Libya is a genuine revolution. The military is split," Zeihan told Al Jazeera in a phone interview. A recent uprising in Egypt did not qualify as a revolution, he said, because the military remained united and firmly in control.

Libyans may be excited about the prospects of change. But energy markets beg to differ. "In general, oil markets prefer stability and stability often comes with [various] modes of governance," said Jones, hinting that markets are not perturbed by dictatorships, so long as the pipelines keep gushing.

"The best case scenario, from the oil market’s stand point, would be for unrest to calm," Jones added. "That might be at odds with the populace." The analyst would not comment on what would happen to energy markets if unrest spread to Saudi Arabia, the world’s biggest oil producer.

Some analysts are comparing the current revolutions and protests in the Middle East the 1979 oil crisis. Oil shocks has been linked to recessions and the correlations are outlined in this piece, Here Comes Oil.

The speculators are out and waving their various price war flags. By one, if Libya nationalized oil, the loss is minimal.

The exposure to Libya in our oil company holdings, expressed as a percentage of annual BOE (barrels of oil equivalent) production for each company is:

COP 3.3%
CVX 0%
TOT 2.6%
RDS.A 0%

On average, if Libya were to nationalize all foreign oil assets, our individual oil company portfolio positions would lose about 1.5% of production. We consider that risk to be acceptable at this time.

Other funds in our portfolios have oil companies within them. For example, SPY (representing the S&P 500) has 12.78% of its assets allocated to the energy sector

The three top oil producers in the sector (Exxon, Chevron and Conoco-Philips) have a combined weight in the sector of 43.2%.

Exxon has a 27.2% weight in the sector and has zero production in Libya. Chevron has a 12.7% weight in the sector and has zero production in Libya. Conoco has an 8.26% weight in the sector and has 3.3% of its production from Libya.

In 1979 the United States had an oil crisis and high inflation. The oil crisis was caused by the Iranian revolution. People in the United States protested, violence broke out, Reagan won the Presidency and real wages never recovered. The U.S. middle class was never the same again.

The 1979 oil crisis history is detailed in the epic oil documentary, The Prize.

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One has to wonder

What level of "subjective" element is involved in the oil price spike?

the big picture

thanks for the link to the prize Robert. It is interesting to note that if you measure the oil price in another currency, it has not risen as much. For example the Oil price in Yen is still trading at $65 equivalent.

Intrinsic Value: Comparison of current oil price adjusted for exchange rates

Carry Trade

Nice blog, to write without going into a moderation queue one needs to register. Working on improving that.