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Oil-Price Swings Double as Unrest Spreads Before Saudi Talks

U.S. Deputy Energy Secretary Daniel Poneman
Daniel Poneman, U.S. deputy energy secretary. Photographer: Jay Mallin/Bloomberg

Oil-price swings have doubled this year as unrest spreads through the Middle East, source of one-third of global crude supply, hampering producer and consumer efforts to stabilize the world’s biggest commodity market.

As officials from more than 90 nations including Saudi Arabian Oil Minister Ali al-Naimi and U.S. Deputy Energy Secretary Daniel Poneman gather in Riyadh tomorrow to seek ways of curbing fluctuations, oil’s 20-day historical volatility has risen to 29.4, according to data compiled by Bloomberg. It was at 12.6, an all-time low, at the end of December. U.S. futures for April jumped as much as 4.5 percent today as violence spread in Libya, holder of Africa’s biggest crude reserves.

Oil has risen to a two-year high, with Brent crude prices in London exceeding $105 a barrel today, as the Middle East turmoil stoked concern that shipments from the region may be disrupted. Libyan leader Muammar Qaddafi’s son warned yesterday that a civil war would risk the country’s oil wealth as security forces attacked protesters, killing more than 200, according to New York-based Human Rights Watch. Nations including Iran and Bahrain are cracking down on opposition groups demanding change amid upheaval that’s toppled leaders in Egypt and Tunisia.

“Prices gyrate wildly with each new headline,” said Mike Fitzpatrick, Energy Overview editor in New York, and a former futures broker at MF Global. “If more moderate and friendly-to-the-West governments like Jordan or Bahrain topple, $100 may not be so ridiculous as it seemed only a few days ago.”

Libyan Oil Production

Shokri Ghanem, chairman of Libya’s National Oil Corp., said he didn’t know if unrest sweeping the North African nation has affected its crude output. “Until now, we don’t have any information,” he said in a brief telephone interview from the country’s capital, Tripoli. An official at Milan-based Eni SpA, the biggest foreign producer in Libya, said today that operations in the country were normal. Libya pumps 1.59 million barrels a day, according to Bloomberg estimates, the biggest North African producer to experience mass protests so far.

In response to rising prices, OPEC is already pumping the most oil since agreeing to production cuts in December 2008. U.S. inventories are 6.4 percent higher than their five-year average, storing up the possibility of a price plunge once the winter-demand period ends.

Riyadh Meeting

Representatives meeting in the Saudi capital tomorrow will include producers in the 12-nation Organization of Petroleum Exporting Countries, the 28 consuming countries of the International Energy Agency, as well as China, India and Brazil. The International Energy Forum meeting will approve a charter aimed at finding mechanisms to stabilize energy markets and improve the collection and publication of supply, demand and price data.

“We are not addressing prices at our meeting, we are discussing volatility in the market,” Prince Abdulaziz bin Salman, Saudi Arabia’s Assistant Minister of Petroleum Affairs, told reporters at a press conference in Riyadh.

So far 87 out of 95 countries have agreed to sign up to the charter which is not a legally binding international treaty but a politically enforced agreement between all countries signing the treaty.

“The signing of the new charter comes at the right time and place in conditions that witness some fluctuation in energy markets,” al-Naimi said in a Feb. 18 statement e-mailed by the Saudi Ministry of Petroleum and Mineral Resources.

OPEC’s next policy-setting meeting is scheduled for early June, in Vienna. The group has ignored output quotas as prices have soared, pumping about 2 million barrels a day, or 8 percent, more than the official limit for 11 of its members.

Oil Surges

Crude for April delivery advanced as much as $4.76 to $94.47 a barrel in electronic trading on the New York Mercantile Exchange while April Brent on the London-based ICE Futures Europe surged as much as 2.6 percent to $105.15, the highest for a contract closest to expiration since Sept. 22, 2008.

The Paris-based IEA raised its forecast for 2011 global oil demand for a fifth straight month in a Feb. 10 report, as consumption recovers from the recession.

“The current wave of geopolitical uncertainty is affecting both expectations of potential volatility in immediate oil flows and the longer-term implications of a more uncertain investment climate,” said Paul Horsnell, London-based head of commodities research at Barclays Capital.

Price swings are also likely to be in focus at the International Petroleum Week conference in London this week, attended by oil traders and brokers from companies such as BP Plc, ICAP Plc, Vitol Group and state-run Saudi Aramco.

London’s IP Week

The mood in London will probably be “positive,” with “a lot of talk of OPEC capacity and the Middle East violence” said Andrey Kryuchenkov, a London-based analyst at VTB Capital.

Exporters are concerned there may still be a drop in prices amid rising U.S. inventories and the onset of spring in the northern hemisphere, when fuel consumption typically ebbs.

“The lesson is that until the market is confident that risks have subsided, volatility will remain high,” Lawrence Eagles, head of commodities research at JPMorgan & Chase Co., said in a note. “To this extent, the market is happy to absorb the extra barrels that are coming from OPEC, despite the beginning of seasonally lower demand for crude and heating fuels.”

The widening discount of U.S. West Texas Intermediate crude to North Sea Brent crude will be another “key theme” in discussions in London, Horsnell said. “It is likely to be difficult to get too far away from the gyrations in WTI prices, and the severe stress that the Midwest oil market is under.”

WTI crude traded as much as $16 a barrel less than Brent last week, comparing April contracts for both grades, as the U.S. futures benchmark remained under pressure from a supply glut at its delivery point in Cushing, Oklahoma.

The 20-day historic volatility index measures how much crude fluctuates around its average price during that period. OPEC’s 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

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