Goldman’s Michele Della Vigna presents 5 key points on the situation in oil.
A major production shut-down is possible, as security in Libya deteriorates
The security situation in Libya is becoming increasingly worrying, with reports of escalating casualties from clashes in several urban centres. Some international oil & gas operators are evacuating the country and temporarily shutting down operations, due to safety concerns for their own employees and contractors.
A large shut-down in Libya would push effective OPEC spare capacity below 2 mn bls/d and accelerate demand rationing pricing
We estimate that OPEC currently holds 2.5-3.0 mn bls/d of effective spare capacity (just below 5 mn bls/d if we were to assume that Saudi can produce 12 mn bls/d of crude). This would cover for a possible complete shut-down of Libyan production, and there are sufficient global inventories to cope with a short-term shock. However, a prolonged supply disruption at a time when spare capacity is so thin is likely to prompt a quicker need for the demand rationing pricing that we previously envisaged for 2012.
An analysis of demand rationing pricing shows that our peak oil price assumption of $110/bl might prove conservative
We have looked at the spend in gasoline as a percentage of GDP and disposable income in the US through the 1970s, when a supply-led shortage led to an oil price spike that generated four years of demand contraction. This analysis suggests that demand rationing pricing could happen well above the $110/bl that we are currently using for 2012.
Although higher oil prices would benefit oil companies in the short term, they could be detrimental in the longer run
Although oil companies levered to the oil price and with minimal exposure to North Africa would benefit in the short term from an increase in the oil price, we believe that a very rapid increase in the oil price and the subsequent negative demand reaction could be detrimental to the sector in the longer run, increasing volatility and cost of capital.
Price spike would be negative for simple refiners, good for complex
A sudden spike in the oil price would likely squeeze simple refining margins. However, a substitution of light Libyan crude with heavier barrels from Saudi would likely widen light-heavy spreads that benefit complex refineries.