OPEC, Libya, and Nigeria

OPEC, Libya, and Nigeria, LNG, Sarir, Forcados, Africa, premium grade oil, gas

Why Nigeria can't export more of its premium grade, the consequences of the conflict in Libya and OPEC's disunited response

With premium grade crude from Libya's giant Sarir and other fields off the market a renewed case could be made for a substantially larger Nigerian allocation within OPEC's already exceeded quota system. But that of course has been ruled out by the disharmonious outcome of the 159th Meeting of the OPEC Conference in June. Prices have stayed well above the Organisation's 'fair' level – one of the objectives of the national output ceilings set in 2007 - for well over 12 months now and Libya produced 1.6mn b/d last year. All but 0.2mn of those barrels of paraffin-rich crude were exported.

There was no sign of such a concession being announced in Vienna and the subject is apparently off the agenda until the next meeting in December. “No formal agreement” was the term used within the Organization.

Shortfall conditions

With such disarray, including between African exporters, market analysts are starting to suggest that what has already happened to the global liquefied gas trade is now starting to happen with crude oil. That is, effectively breaking up the whole into separate regional markets under continuing shortfall conditions in the Far East and a possible surplus in the Western hemisphere.

The oil trades are much bigger than the 300bcm LNG business, so the trend will be more far reaching. And import-dependent Japan's recent woes have just made the apparent fragmentation situation worse. The problem is that more of the heavy sulphur-rich crude pumped by Arabian Gulf producers – and as usual it has been Saudi Arabia that has largely compensated for the Libyan shortfall so far, with further spare capacity on hold – is not really wanted in OECD markets, like Europe's, where refineries are middle-aged and operators fussy about what they buy. Light crudes such as Europe's local Brent and Nigeria's Forcados fetch a premium here. So West African oil, a close match for Libya's in Rotterdam, could be diverted to Europe instead.

Asia

Meanwhile in developing Asia, importing/refining countries like Singapore - and above all China - where so much new capacity has been added recently, can readily adapt their processes to accept the substitute material from the Gulf. If Iran and other dissenters can be persuaded to pump more.

So not only are at least two separate international markets likely to develop for crude oil, but the differential between prices for the different grades could continue to widen too. In recent years the traditional $5 premium fetched by Brent crude over the typical Gulf price has been eroded, to an average of just $1.50 in 2010, but this is already starting to return.

'Demand destruction'

And it is particularly worrying that global 'demand destruction' as it has been called since 2008 – the massive dampening effect of prevailing high prices on key consuming countries like the USA that can adapt by reducing unit consumption of industrial output ('oil intensity') - is now starting to be seen in developing Asia, too. Chinese consumption grew by 10 per cent last year, and these are the countries that have caused most of the demand increase seen in recent years.

A slowdown in the Chinese economy, a rise in interest rates in the USA and/or more economic trouble in Europe are the last things Africa's oil exporters need right now.

Libya's contribution

All this against the background of world demand for oil rebounding by nearly three million b/d. In May the International Energy Agency trimmed its forecast for demand growth this year by 190,000b/d, apparently expecting no return of Libya's contribution to supply within the year.

Noting the extensive damage to internal transport facilities in particular independent analysts mostly agree with this. Meanwhile in the Gulf states prevailing high prices, considered excessive just a few months ago because of their effect on global demand, are now welcomed because so many new local public expenditure commitments have been made since the beginning of this extraordinary year.

The whole situation caused the IEA's governing board to issue an unusual statement on 19 May. “Oil prices remain at elevated levels driven by market fundamentals, geopolitical uncertainty and future expectations,” it said.

“There are growing signs that the rise in oil prices since September is affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates...There is a clear urgent need for additional supplies on a more competitive basis to be made available to refiners.”

Following the Vienna fiasco it warned of “undermining economic recovery, which is in the interests of neither producers or consumers,” adding that it “stands ready to work with its member governments and others to help ensure markets are well supplied.”

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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