Libyan Crude Output Loss Offers Prompt Buy Option, Goldman Says

Libyan crude output losses and the possible escalation of unrest in Syria provide an option to buy front-month futures, according to Goldman Sachs Group Inc.

Protests at oil fields and ports in Libya have reduced supply from the country to the lowest since October 2011, prompting Goldman to halve its forecast for production this month to 500,000 barrels a day, the bank said in a report today. With Iraq’s output forecast also revised down by 100,000 barrels a day, this will cause a shortage in spare capacity from the Organization of Petroleum Exporting Countries this month, according to the bank.

The premium of front-month Brent to the second, or backwardation, widened to $1.90 a barrel on Sept. 3, the most since November 2012. This structure, allied to the lack of supply, gives investors with an opportunity to double their returns by buying prompt futures and holding on to them, said Jeffrey Currie, a New York-based analyst at the bank.

“With currently high levels of backwardation in oil, investors can earn returns even when prices are expected to be flat, or even fall slightly, by buying deferred oil contracts and waiting as they approach expiry,” Currie said. “Rolling the front-end over the course of one year would generate nearly twice the return of buying one year out and holding to maturity.”

The risk to oil output remains greater in Libya than in Syria, with the loss to OPEC’s spare capacity occurring at the same time as petroleum inventories in members of the Organization for Economic Co-operation and Development are set to fall to their lowest levels since 2004, the bank said.

This shortage is driving Goldman’s forecast for Brent to trade at $115 a barrel in the near-term. The October contract was at $112.31 as of 10:07 a.m. London time on the ICE Futures Europe exchange. Longer-term the tightness in supply will probably ease with the bank predicting crude to drop to $105 a barrel, barring any spillover of hostilities in Syria to neighboring countries.

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