On Monday, the 28th of February, crude oil prices slightly rose after the shutdown of the majority of oil refineries in Libya, and amidst fears that the unrest in the Middle East could spread to Saudi Arabia. However, they eventually eased by the end of the day after the Saudi state oil company Amarco announced that it was meeting the shortage of supply from Libya. The price reduction was further boosted by news that the eastern Libyan port of Tobruk had been opened again. Brent prices closed at USD $ 111.48 per barrel, slightly above its previous week’s price of USD $ 110.70 per barrel. WTI Sour, Midlands price was of USD $ 93.12 per barrel, down from last week’s price of USD $ 94.04 per barrel.
However, the ease in the oil prices was only short lived, as prices surged on Tuesday, the 1st of March, with Brent closing in at USD $ 113.07 per barrel, and WTI Sour, Midlands closing at USD $ 95.78 per barrel. The deteriorating situation in Libya aggravated the increase in oil prices. It was further compounded by the fact that there was uncertainty in the market about whether Saudi Arabia had the spare capacity to plug in the loss of oil production from Libya. Several market analysts fear that Saudi Arabia has already crossed its peak oil production, which is supported by the fact that in December 2010, global oil production fell by 14%, with the fall in Saudi Arabian production of 4%. The uncertainty over whether the kingdom has excess capacity to prevent short-term cuts in oil supply adversely affected oil prices throughout the week.
Prices continued to increase on Wednesday, the 2nd of March, with oil prices touching the USD $ 100 per barrel in the North American market. Brent closed at USD $ 114.83 per barrel, and WTI Sour Midlands closed at USD $ 99.38 per barrel. The situation in Libya worsened, with Muammar Qadhafi’s forces wrestling key oil sites back from the control of the rebel forces. Rumours about unrest spreading to Iran, Oman and Saudi Arabia further fueled the prices. Oman is the largest non-OPEC producer in the Middle East, and is in close proximity to the Straits of Hormuz, through which around 40% of the world’s oil tanker traffic passes daily. Political upheaval in this otherwise politically dormant kingdom would spiral global oil prices upwards even further.
The Saudi King is extremely sick. Vested groups harbouring grievances against the government are watching this development closely. If the succession problems after the king’s death become prolonged and bloody, then, oil prices are expected to spiral past record levels pretty soon.
Iran is the second largest producer in OPEC, behind Saudi Arabia. Political upheaval in the Islamic Republic would severely affect global oil supply and prices.
The situation appeared slightly optimistic on Thursday, the 3rd of March, after the Secretary-General of the Arab League, Amr Moussa, confirmed that Qadhafi agreed on a plan proposed by the Venezuelan President, Hugo Chavez, to seek a negotiated settlement with the rebels. Brent closed at USD $ 114 per barrel, and WTI Sour Midlands closed at USD $ 98.41 per barrel.
However, not everyone is viewing this recent development with optimism. Many analysts believe that the rebels are unlikely to accept a negotiable agreement proposed by Hugo Chavez, who has long been one of Qadhafi’s most trusted allies. The decrease in oil prices is being viewed by many as just a passing impact rather than signifying a decreasing trend in prices.
Furthermore, the uncertainty regarding the political condition in Bahrain, Oman, Saudi Arabia and Iran is expected to affect crude oil prices in the weeks to come.
Fears about the peace deal proposals for resolving the Libyan crisis falling flat came true on the 4th of March, when pro-government warplanes dropped bombs near a military base held by rebel forces in the eastern town of Ajdabiyah. Brent crude prices climbed by more than 1% to close at USD $ 115.47 a barrel, while WTI Midlands closed at USD $ 100.92 a barrel.