Crude Oil Spikes to Nearly $110 per Barrel on
Iranian Tensions
February 28,
2012 (Wakefield, MA) – The price of crude oil surged to almost $110 a barrel
on Friday, February 24 as uncertainty about Iran and its nuclear program
continued to impact oil prices. Tensions
were exacerbated by
Iran
’s announcement on February 19 that it was cutting off exports to the United
Kingdom (UK) and France. While
Iran
’s oil does not account for a major amount of the oil supply of the
UK
and
France,
Iran
has been exporting about 300,000 barrels per day (BD) to European Union
countries. Iran
’s move was in response to the European Union’s announced intention to cut
off Iranian oil imports and freeze central back assets, beginning in July.
The last
time we published a Flash Report on oil prices, almost exactly a year ago, the
news was that oil prices were had exceeded $100 per barrel, due to unrest in the
Middle East and Northern Africa. The
most immediate cause of this spike in oil prices was reduced production from Libya. The Libyan situation has at least
been partially resolved in favor of democratization, and oil wells are coming
back online.
Other areas
in the Middle East that have been hot spots include
Bahrain,
Syria,
Egypt, and Tunisia
.
The news
this time is much more dramatic, with oil prices exceeding $100 for the first
time since October 2, 2008. Energy demand is increasing along with the improving
economy, and this increasing demand is helping to push prices higher. But the
main driver of the current spike in oil prices unrest is the Middle East and
Northern Africa, including
Egypt, Bahrain,
Algeria,
Tunisia,
Iran, and especially Libya.
Oil prices
peaked in the range of $140 per barrel in mid-July 2008. They then went into a
steep decline, bottoming out at less than $40 per barrel in December 2008. Oil
prices increased to more than $60 per barrel in June 2009. From October 2009
until March 2010, prices fluctuated between $70 and $80 per barrel. Finally,
beginning on March 3, 2010, oil prices closed above $80 per barrel. Since that
time, oil prices have been creeping up past $90 per barrel.
It was the one-two punch of events in
Egypt
and
Libya
that pushed prices over $100 per barrel.
Now the crisis in
Libya
puts things in clearer perspective. Oil prices have spiked to more than $100 a
barrel, and the instability in
Libya
and some other countries in the region is continuing.
While the crisis in
Egypt
caused prices to rise by about $3 a barrel, there are some important
differences between
Egypt
and
Libya
.
In 2010,
Egypt
’s oil production averaged 660,000 barrels per day.
Libya
has more proved oil reserves than any country in
Africa
, at 41.4 billion barrels, and produces 1.88 million barrels per day. The
amount of oil produced by
Libya
is roughly equal to that produced by the
Gulf of Mexico
. So
Libya
produces close to three times as much oil as
Egypt
. As of now, daily output is reduced
by from 1/3 to 1/2. In addition, Libyan oil is light sweet crude, the most
desirable type.
West Texas
Intermediate (WTI) vs. Brent Crude Oil
While there are many types of oils and oil contracts, two of the most widely
followed oils are WTI and Brent. WTI
is typically refined in the West Coast and Gulf regions of the
United States
, and is centered in
Cushing,
Oklahoma. It is lower in sulfur than Brent, with a sulfur content of about 0.24%, while
Brent’s sulfur content is about 0.37%, and both oils are classified as sweet
crude. By contrast, oil from Venezuela
has a sulfur content of about 4.5%. Brent
is a combination of 15 crude oils located in the
North Sea
.
Historically, WTI has traded at a slightly higher price than Brent, mainly
because it is easier to refine. Lately,
however, Brent has at times traded at close to $20 more than WTI.
The reason has to do with the origin and destination of oils. Because
much of the oil from the Middle East goes to Europe, oil shortages in the
Middle East
have a more pronounced effect on Brent than on WTI.
In particular, the unrest in
Egypt
caused Brent crude to surge to over $100 per barrel. The unrest in
Libya
pushed Brent crude prices to almost $120 per barrel.
The Saudi Effect
Some people say "It doesn't matter about
Libya
, because Saudi Arabia
can make up the difference." Well, yes and no. Saudi Arabia has the
capability to increase production to offset the diminished production in Libya,
assuming they choose to do so, but theirs is not so much the light sweet crude
as the heavy, sour crude (like what is produced by Venezuela). So we're not
really comparing apples to apples but apples and oranges.
Libya's light sweet crude is not so easy to replace.
There is no doubt that a wave of democratization is
sweeping through the Middle East and northern
Africa
, and this wave will not be so easy to stop.
The countries that are most immune to radical change at this point are
Saudi Arabia
, the United Arab Emirates (UAE), and Oman. The reason is that even though
these countries are monarchies or a federation as is the UAE, these governments
do a lot for their people, including giving them cash grants, so discontent is
much lower there. It is in the countries with military dictatorships like
Libya
and
Iran
and little freedom where change is more likely to occur.
What it Means: the
“Orifice Plate Effect” at Work
To find out what it all means, including line charts and
analysis, go to www.WorldFlow.com, the
Flow Research subscription service.