Middle East Unrest’s Effect On Crude Oil: Short Terms Highs Of 120 With Correction To 90

HedgeFundLIVE.com — Due to the unrest in the Middle East that threatens oil supply, crude has been rallying, breaking above $100 last week.  Libya, the 12th largest exporter of oil in the world, the third largest producer in Africa, and the largest holder of crude oil reserves in Africa, has cut oil production by about 50%, according to the country’s oil chief on Monday.  

Although Libya  produces <2% of the world’s oil and does not export much of it to the U.S., the high quality of its reserves is rare: its light, sweet crude oil cannot easily be replaced by many European and Asian refineries, which are not equipped to refine sour crude.  Note that Saudi Arabia’s recent pledge to ensure sufficient oil supplies would tap into its >4M barrels of spare capacity, the bulk of which is for sour grades of oil.  Hence, I am not quick here to downplay the Middle East situation’s impact on oil.

Some are claiming that the Gaddafi government would not destroy Libya’s oil infrastructure as oil is too crucial to the country’s economy: oil accounts for 95% of Libyan export earnings, 25% of GDP, and 80% of government revenue (CIA World Factbook).  To that I say, yes, Gaddafi is in fact that crazy that he would destroy the oil infrastructure.  (See examples of irrational government action in Russia during WWII and Saddam Hussein in Kuwait.)  I do believe the threat of supply disruption is heavy, which will keep oil prices elevated. 

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