Syed Rashid Husain GEOPOLITICAL volatility, supply disruptions, state of global economy and macroeconomic management continue to haunt – and indeed impact – the crude markets. Despite a glut-like scenario, and slippage somewhat early in the week, crude markets seem to be firming up over the last few days. Oil futures closed above $106 a barrel Friday, paring their loss for the week, as a drop in July new US home sales raised the possibility that the Federal Reserve may delay a slowdown in monetary stimulus. Crude oil for October delivery rose $1.39, or 1.3 percent, to settle at $106.42 a barrel on the New York Mercantile Exchange after touching a high of $106.94. Brent crude on the ICE futures exchange settled $1.14, or 1 percent, higher at $111.04 a barrel, as traders continued to monitor wearily the emerging situation in Egypt, Libya and Syria. Explosions in Lebanon killing at least 29 people also added to the volatile specter.
The ongoing political crisis in Egypt has stoked concerns in the market. Although the country is no major oil producer, yet the country is home to the Suez Canal and the Sumed pipeline, which together carry around 4.5 million bpd of oil between the Red Sea and the Mediterranean. Some already fear an Algeria like situation emerging in Egypt, with ramifications for the entire region and indeed the crude world, if the current political stalemate is not handled deftly. A resolution to the Egyptian crisis could see a rapid fall in market prices from $110 to near $93, Daryl Guppy underlined in a recent CNBC analysis. And in the meantime, a new wave of unrest seems plaguing Libya too, compromising its crude export potential. The disruptions started about a month ago as members of the Petroleum Facilities Guard, a specialized armed task force to protect oil facilities, went on strike over what they said were unpaid wages. They were joined by other people seeking jobs at the facilities and employees wanting higher pay. The strikes have effectively shut down shipments from terminals there, which account for more than half of Libya's $60 billion of oil exports annually. As a result, Libyan storage facilities are filled with crude, crimping any new production. According to data supplied by the Libyan Oil Ministry, Tripoli's output fell in the first half of August to about 500,000 barrels per day—about one-third the highs reached last summer and the lowest level since just after Libya's civil war ended in late 2011. In recent days two terminals near the eastern cities of Brega and Tobruk have restarted operations. But some others remain blocked. Oil Minister Abdelbari Al-Arusi said that Libya had lost about $1.6 billion (£1 billion) in revenue since 25 July because of the disruption. Interestingly, on Tuesday, a Libyan official was quoted by the press as saying that oil trader Vitol Holding BV and other large companies had received an offer to buy Libyan crude outside official channels. Vitol refused the offer and told Libyan authorities, the official said. This is a stark development. For it marks the beginning of a new era in Libya, with a central government not fully in control. It has the potential to be a bleeding wound on the global crude markets. Realizing the gravity of the situation, Libyan Prime Minister Ali Zeidan warned that any ship approaching the ports which does not have a contract with Libya's official oil company would be "bombed from the sea or the air". And shots were reportedly fired at an oil tanker, apparently approaching port without clearance from the government authorities, deepening the crisis in Libya's oil industry and triggering renewed fears among oil majors that one of Europe's largest suppliers could soon descend into lawlessness. "Libya is rapidly building up a reputation for unreliability, which will inevitably be built into prices," London-oil broker PVM Oil Associates Ltd said in a note. Shipping market operators also say insurance underwriters are asking for an extra levy on top of the typical war cover for Libya. Some positive global economic data too helped in the meantime, in the firming up of the oil markets. The eurozone's purchasing managers' index, a key gauge of growth in both the manufacturing and services sectors, rose to 51.7 points in August from 50.4 in July, according to financial information company Markit. It was the highest reading since June 2011, supporting expectations that the eurozone's recovery from recession is gaining momentum. Yet not all players were far from convinced. Some remained skeptic, underlining the eurozone's recovery was uneven and being driven by outsized momentum from Germany. "Output levels slowed notably in France in both the sectors, in sharp contrast to strong outcomes out of Germany. This validates the fragile nature of the turnaround in activity, as growth is not on firm ground even amongst the core member countries," said analysts at DBS Bank Ltd. in Singapore in a commentary. Upbeat data from China too kindled hope for better demand from the world's now largest oil importer. Activity in China's manufacturing sector hit a four-month high in August as new orders rebounded. Bill O'Grady, chief market strategist at Confluence Investment Management too appeared concerned about a potential steep slide in prices after Labor Day when US summer gasoline demand drops. Yet for the moment, the demand in US appeared rising. Refiner demand for crude last week was reported to be the highest at this time of year since 2004, as crude stockpiles in the US declined by 1.4 million barrels for the week ended Aug. 16, compared with the Platts consensus estimate of a 1 million-barrel decrease. Gasoline supplies, in the meantime, also dropped by a more-than expected 4 million barrels. Early last week, Goldman Sachs said it expected tighter oil markets to propel Brent to $115. "In our view, these developments will likely lend support to Brent prices around the $115/barrel level in the very near term," Goldman Sachs' Jeff Currie said in a note to clients last Monday. In the note, Currie raised his 3- and 6-month Brent price forecasts to $110 and $108, respectively, from $105, though his 12-month target continues to be $105. At least for the time being, volatility seems to be the order of the day. The risk for oil is only in the upside, some seem underlining now. And they have reasons, one has to concede. Geopolitics and oil continue to be an explosive mix!
