[T.S.R:17038] Goldman Sachs:The Oil Buffer Is Shrinking

When we first commented on the developments taking place in the Middle East and North Africa we highlighted the risk of contagion. We noted that countries with low income levels, high inflation and unemployment in politically less stable regions would be more susceptible. 

The contagion risk has to a large extent materialized. Social unrest has indeed spread from Tunisia and Egypt over to other parts of the region. Jordan, Yemen and more recently Libya have been impacted and the situations in Yemen and Libya appear to be particularly unstable. However, there are a number of economies with similar traits that could be susceptible to further contagion, namely Algeria, Syria and in the extreme maybe even Iran. 

 

Physical disruptions have pushed oil prices above $110/bbl. The escalating civil unrest in Libya has now led to the evacuation of oil crews and production shut-ins by foreign operators for safety reasons. We believe, however, that contagion risk is still the primary driver of oil prices, not these physical disruptions.

The current disruptions, which we estimate to be about 500 thousand b/d, are not large enough to substantially shift the global oil market balance, in our view. And even if it eventually impacts all of Libya's 1.5 million b/d of oil exports, we believe the high level of global inventory could easily accommodate this for more than 100 days and OPEC spare capacity could easily absorb the entire loss if needed. 

More important, however, is that the market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of OPEC's spare capacity. This makes the risks now associated with further contagion much higher than they were several days ago, as further disruptions could now create severe shortages in global oil markets that would require substantial demand rationing.  

Although we still see contagion to the large energy producers in the Gulf as relatively low, the stakes associated with further contagion are now much higher, which creates even further upside risk to our price forecasts.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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