Egypt Riots Add Pressure on OPEC With $100 Oil: Energy Markets

Ali al-Naimi, Saudi Arabia's oil minister
Ali al-Naimi, Saudi Arabia's oil minister. Photographer: Vladimir Weiss/Bloomberg

OPEC is under pressure from consumers to boost supply as most of the world’s benchmark crudes surpass $100 a barrel amid political unrest in North Africa and the Middle East.

Oil prices are high enough to “derail” the global economic recovery, Fatih Birol of the International Energy Agency said this week. Saudi Arabian Oil Minister Ali al-Naimi said last week prices nearer $75 would be “appropriate.” Goldman Sachs Group Inc. says the Organization of Petroleum Exporting Countries has already raised output.

“OPEC needs to put in more barrels this year, given how strong demand has been,” said Amrita Sen, a commodity analyst at Barclays Capital in London. “Above $100 there would be a bit more urgency to increase their volumes, because at the end of the day what they want is more stability.”

Riots in Egypt that have led to concern of disruption to shipments through the Suez Canal sent North Sea Brent above $100 a barrel for the first time since October 2008 this week. Six of the world’s 10 most-used oil price markers, including Nigeria’s Bonny Light, Malaysia’s Tapis, Indonesia’s Minas and Louisiana’s Heavy Sweet and Light Sweet grades, have breached three digits, stoking speculation governments will struggle to contain inflation as economies recover from the recession.

‘Calm the Market’

“Naimi has announced they’re thinking of production increases; there will be some production increases,” Christof Ruehl, chief economist at BP Plc, Europe’s second-biggest company, said in an interview with Bloomberg Television on Feb. 2. “If markets are getting very worried about the political situation in the Middle East that could even foster production increases by OPEC to calm the market down.”

The world’s energy bill as a share of the economy will return to the 9 percent level of the 1980s, when oil costs tipped consuming nations into a recession, should crude advance to $115 a barrel this year, Bank of America Merrill Lynch said in a Jan. 25 research report.

Twelve European nations, recuperating from last year’s sovereign debt crisis, already face record gasoline prices, including taxes, European Commission data on Bloomberg shows.

Brent crude dropped $1.90 to $99.86 a barrel on the ICE Futures Europe exchange in London as of 5:19 p.m. local time. It reached $103.37 during yesterday’s trade, the highest level in 28 months. West Texas Intermediate fell as much as 2.3 percent to $88.45 on the New York Mercantile Exchange after a U.S. government report showed that the economy added fewer jobs in January than economists forecast.

Derail Economy

“Just before the turmoil in Egypt we already had very high prices as a result of strong demand growth expectations for the next year,” Birol, the chief economist of the Paris-based IEA, which has advised energy-consuming nations since 1974, said in a Feb. 2 interview with Bloomberg Television. “The turmoil in Egypt has been a trigger. Brent over $100 is a risk to derail the economic recovery.”

The Suez Canal and the adjacent Suez-Mediterranean Pipeline have remained open throughout the Egyptian unrest, carrying about 2 million barrels a day, or 2.5 percent of world oil production, according to Goldman Sachs. Even before the unrest the links weren’t operating at full capacity which is about double this amount.

A halt of 1 million barrels a day or more would trigger a response from OPEC, according to the group’s Secretary-General Abdalla El-Badri. “If we see a real shortage we will have to act,” he told reporters in London on Jan. 31. “But I don’t think this will happen.”

The 11 OPEC members subject to production quotas pumped 26.85 million barrels a day last month, the most since it announced supply cuts in late 2008. The group accounts for 40 percent of global supply.

Curbing Rally

Saudi Arabia, the largest member, may already be seeking to curb the oil rally. State-run Saudi Aramco on Feb. 2 cut prices for its March crude sales to Asia, its biggest market, contrary to the expectations of five refiners surveyed the previous day by Bloomberg News.

OPEC is due to meet on June 2 to review its daily quota of 24.845 million barrels, which it’s currently exceeding by about 2 million barrels, according to data compiled by Bloomberg. Most OPEC ministers will also gather in Riyadh, Saudi Arabia, on Feb. 22 for a meeting of the International Energy Forum.

While OPEC has left its quota unchanged at seven consecutive meetings, global inventory levels suggest the group is raising output, Goldman Sachs said in a report on Jan. 24. The group’s effective spare capacity, which excludes Iraq, Nigeria and Venezuela, dropped below 5 million barrels a day in December, the first time in two years, according to a Jan. 18 IEA report. Stockpiles held by companies in the most developed economies were at 2.742 billion barrels in November, close to the top of their five-year range, it said.

‘No Shortage’

Plentiful supplies make any production increase unnecessary, according to Shokri Ghanem, chairman of Libya’s National Oil Corp. “We don’t feel there is a shortage in the market,” he said in a Feb. 3 Bloomberg Television interview.

The political turmoil in the region started in Tunisia with the Jan. 14 ouster of President Zine El Abidine Ben Ali has spread to Yemen, where thousands of demonstrators gathered yesterday in the capital and police used tear gas in the port city of Aden. More violence may occur in Egypt today after Friday prayers.

Any escalation of the crisis in Egypt would require Middle East producers to divert Suez shipments on a longer route that avoids the canal, rather than increase supply, according to Edward Morse, Credit Suisse AG’s head of commodities research. Additional barrels aren’t needed because demand will slacken as winter ends in the Northern Hemisphere.

‘Dangerous Time’

“This is a particularly dangerous time to open the taps,” Morse said in an interview in London on Feb. 1. “This is not a supply disruption. It just means that flows that would have occurred now occur in a more expensive way and take longer to get where they’re going.”

Rising demand means an extra 300,000 barrels a day is needed from OPEC to stem oil’s advance, Bank of America Merrill Lynch said on Jan. 25. JPMorgan Chase & Co. said that any premium caused by events in Egypt has already dissipated, and that $100 oil reflects levels of supply versus demand.

Rather than damping oil’s rally, additional OPEC exports may signal that demand is recovering faster than anticipated and that spare supply will shrink, according to Goldman Sachs.

Higher production “ultimately accelerates the draw on OPEC spare capacity,” analysts led by Jeff Currie in London wrote on Jan. 24. This may indicate “the market may already have moved into the second stage of its cyclical recovery to a structural bull market,” they said.

The four benchmark crudes that haven’t risen above $100 a barrel are WTI and Mars blend in the U.S., Oman and Murban grades in the Middle East.

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