Beyond Libya, oil market warily eyes Saudi Arabia

Motivated by recent shows of political strength by neighbors in Egypt, people in the Middle East and North Africa are taking to the streets of many cities to rally for change.
The Associated Press
Tuesday, March 8, 2011; 5:17 PM

NEW YORK -- Beyond the crisis in Libya, what's driving up oil prices is concern about Saudi Arabia.

The world's largest oil exporter is dipping into its excess reserves to make up for lost exports from Libya, where a rebel uprising has largely shut down production. And the Saudis are clamping down on similar, yet smaller, protests at home.

That unnerves energy markets because Saudi Arabia's ability to ramp up production, known as spare capacity, serves a cushion, both real and psychological, when world supplies tighten. And if civil unrest - or an act of terrorism - were to disrupt the kingdom's oil output, the price of crude would likely surge well above today's prices.

Oil futures fell Tuesday as OPEC ministers, including Saudi Arabia's Ali Naimi, discussed an increase in production. The benchmark in the U.S., West Texas Intermediate crude for April delivery, fell 42 cents to settle at $105.02 per barrel. Brent crude dropped $1.98 to settle at $113.06 per barrel on the ICE Futures exchange in London.

Goldman Sachs estimated that OPEC's spare production has dropped by about 1 million barrels per day in the past three months. Part of that is Libya and part is increased world demand. The concern is the cartel won't be able to keep prices in check if another conflict disrupts world supplies, analyst David Greely said.

Greely expects WTI and Brent to both hold above $100 per barrel during the next 12 months. Oil prices have jumped about $20 per barrel since mid-February when the Libyan uprising escalated.

With the entire region in upheaval, it would be a mistake to think the Saudis have shielded themselves from the anger that ousted leaders in Egypt and Tunisia, said Barclays analyst Helima Croft. Demonstrations in neighboring Bahrain have oil traders fearing the unrest could spill across the border. The rebellions in North Africa and the Middle East have taken the world by surprise, forcing a fundamental realignment of the region's political power.

More than 17,000 Saudis have signed up on a Facebook page calling for a "Day of Rage" on Friday, according to Barclays Capital. That's despite King Abdulla's recent announcement of a $36 billion program for employment, housing and education.

"You could say, they're rich, Abdulla's popular, no problem," Croft said. But anything is possible. "If anyone had asked us in January whether (Egypt's) Hosni Mubarak would be gone, most of us would have said 'absolutely not.'"

Analyst and oil trader Stephen Schork said the market is waiting for a sign that the entire region is headed toward a peaceful outcome that will keep crude exports flowing. "That's months away," he said.

Libya produced 1.6 million oil barrels per day before fighting forced companies to evacuate workers. Most of that production is shut down.

Ali Naimi, the Saudi oil minister, said the kingdom has about 3.5 million barrels per day of spare capacity that could be brought online.

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