Lack of information, not lack of oil, driving price rise

McClatchy NewspapersMarch 2, 2011 

WASHINGTON — The continued climb in global oil prices brought on by unrest in Libya is due more to fear than to a shortage of petroleum, but experts warned Wednesday that the Obama administration may have to take steps to drive prices down if they don't fall on their own soon.

The price for a barrel of crude oil for April delivery rose $2.60 Wednesday to $102.23 on the New York Mercantile Exchange — the first time that oil settled above $100 since September 2008, the month that the U.S. financial meltdown began in earnest.

"Global supply is adequate. This is really a fear trade," said Andrew Lebow, a broker at MF Global in New York.

Financial markets abhor an information vacuum and that's exactly what they have this week as media outlets across the globe provide often conflicting accounts of what is happening inside Libya.

What most reports agreed on Wednesday is that there was fierce fighting around Brega, an important oil city with a large refinery.

But the information parted ways on who was winning. Some reports said forces loyal to Libyan leader Moammar Gadhafi had recaptured the city, but other accounts said anti-government forces were celebrating the repulsion of the offensive.

There was also conflicting information about whether Libya is still exporting oil, and to what degree it continues producing oil after the evacuation of foreign nationals from across the globe.

"We are exporting oil. All the Libyan ports are working normally," Ziad Aliwa, the chairman of the Babel Shipping Co., a Libyan tanker operator, told McClatchy in a telephone interview. Oil continues to be exported to Spain and Italy, principal buyers of Libyan oil, he said, adding that "We have three tankers loading at the moment."

Aliwa insisted that oil is still being exported from offshore terminals at Brega, the scene of fighting on Wednesday, as well as at offshore locations at Zueitina and Melitah, though he conceded that "maybe the production (of oil) is down." Aliwa also said that natural gas was continuing to move through the Greenstream pipeline under the Mediterranean Sea to Italian oil company Eni.

That contradicts an earlier news release by Eni that it had suspended operations of the pipeline. Eni's spokesman Filippo Cotalini in Rome didn't respond to a request for comment.

The lack of clear information out of Libya continues to roil markets.

There's apparently some oil being exported from Libya, said Frank Verrastro, an energy expert at the Center for Strategic International Studies in Washington, citing confidential sources in Europe. But it's likely to be slowing to a trickle soon.

"How do you pay, and who do you pay? At what point do the insurance companies (with contracts) on tankers say that it's probably not a good idea to go into port? I'm thinking it's just a matter of days before all exports are shut off," said Verrastro, a veteran analyst. "In terms of shipping, it's going to be increasingly difficult to move stuff."

The conflicting information coming out of Libya may also be deliberate. If Gadhafi is able to export oil under payment to his regime, he's now fetching considerably more per barrel than he did two weeks ago.

"Why would you expect more visibility in a country undergoing civil war?" asked Kevin Book, a managing director of the energy research firm ClearView Energy Partners.

The unrest in Libya should add a $2-$4 risk premium per barrel to the price of global oil at delivery, Book estimates — a number far below what the futures markets are signaling for contracts of delivery of oil in April. There's no "complexity problem" — industry speak for damage to production as opposed to oil that's kept in the ground for whatever reason.

"Even a complexity problem isn't a $15 or $20 (a barrel) problem. The volumes aren't just that big" out of Libya, he said, noting uncertainty is a driver now. "If you don't know anything you definitely have to make sure you are covered, so you pay a premium in the absence of information that would tell you otherwise."

The question for President Barack Obama is whether there's anything he can do to knock down oil prices and provide relief to weary U.S. consumers, who are seeing disposable income shrink with the rise in gasoline prices.

AAA said Wednesday that a gallon of regular gasoline averaged above $3.38 a gallon nationwide, an increase of more than 19 cents over the past week and almost 29 cents from a month earlier.

A handful of lawmakers have called for releasing oil from the Strategic Petroleum Reserve to relieve price pressures. The problem, however, is that there's plenty of oil. If refiners need oil, they can get it and can likely get it cheaper than what they'd have to pay the U.S. government to tap the reserve.

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McClatchy Newspapers 2011

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