Oil Falls as OPEC & US Assure Sufficient Supply. Price Outlook Remains Robust as Spare Capacity Contracts


Oil prices dropped in European session despite rumors that the rebels rejected Libyan leader Qaddafi's offer to exit power in return for leaving the country safely. In the OPEC, oil ministers assured that oil supplies remained sufficient and the disruption in oil facilities in Libya has minimal impact on the markets. Meanwhile, White House Chief of Staff William Daley said that the US government is considering releasing part of its strategic petroleum reserve ( SPR ) in order to curb oil spikes. We believe these comments gave investors reasons to take profits in the oil markets after the relentless rally over the past few weeks.

Currently trading at 104, the front-month contract for WTI crude oil price slipped to as low as 103.33 earlier in the day. The contract jumped to a 31-month high of 106.95 at one point yesterday. Corresponding Brent crude contract, falling for a second consecutive day, initially dipped to a 5-day low of 112.79 before recovering to 114.2. While edging low, the spread between WTI and Brent crude oil prices has remained at around $10/bbl. The gap may narrow further Brent should continue trading above WTI for the rest of the year as a result of geopolitical uncertainty which may disruption supplies in the MENA region.

In light of recent suspension of oil operations in Libya, OPEC members have called for an informal meeting to discuss about possibility of raising oil supplies. According to Sheikh Ahmad al-Abdullah al-Sabah, Kuwait's oil minister, the cartel is 'in consultations but not yet decided which direction'. Separately, Qatar's Energy Minister Mohammed Saleh al Sada said some OPEC members and producers outside the group have substituted the lost crude shipment from Libya and he hardly sees any effect on supply so far.

As we made oil price forecasts for 2011 and 2012, OPEC's spare capacity was considered as an important factor affecting the demand/supply outlook. At February's monthly report, the DOE/EIA estimated OPEC's spare capacity will amount to 4.72M bpd this year. The IEA forecast OPEC-11's spare capacity will be 5.15M bpd while the capacity excluding Iraq, Nigeria and Venezuela will be 4.74M bpd. With Saudi Arabia and some OPEC members making up for the reduction in crude shipments from Libya, spare capacity should have been lowered and this is supportive for oil prices.

We expect both the DOE/EIA and the IEA will revise lower their forecasts on OPEC's spare capacity. Indeed, Saudi's oil capacity may actually be much less than the market has expected. In early February, a Wikileaks cable revealed that a senior Saudi oil executive as saying the Kingdom's crude oil reserves have been overstated by nearly 40%, some 300B barrels. It's reported that Sadad al-Husseini, former head of exploration at the Saudi 's state-owned Aramco, told US consul general in 2007 that it's unlikely for the company keep the capacity of 12.5M bpd, an amount that is required to keep oil prices low.

On the dataflow, only second-tier data are in the pipeline today. In Canada, housing started probably rose to 172.8K in February, up from 170.4K a month ago. Earlier in the day, UK's RBC recorded a -0.4% y/y contraction in retail sales in February, following a gain of +2.3% in January. The Royal Institution of Chartered Surveyors (RICS) said the number of real-estate agents and surveyors saying prices fell exceeded those seeing gains by 26%, down from 31% in January.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Commodities

Referenced Stocks: SPR

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