OIL PRICES NEED MORE THAN A CRISIS / THE WALL STREET JOURNAL

Heard on the Street

Oil Prices Need More Than a Crisis

Even Political Pressures Won’t Address Structural Shifts in Prices

By Liam Denning

Dec. 15, 2014 2:03 p.m. ET

A wrecked building in Libya. News that renewed clashes in Libya could disrupt the country’s oil exports caused oil prices to briefly rally Monday morning. Reuters        


Can Libya save Russia?

With the ruble sliding another 11% against the dollar on Monday, Russia could use a rally in oil prices. As rising supply and weaker demand have pushed Brent crude toward $60 a barrel, the market has focused on how quickly U.S. producers will pull back. That is likely to be a slow and uncertain process, though, so it may take something else to rebalance oil in 2015: political crises.

The market got a taste of this with news that renewed clashes in Libya could disrupt the country’s oil exports, causing crude prices to rally briefly Monday morning. The increase in Libyan production to almost 900,000 barrels a day in October from roughly 250,000 in June helped spark the recent tumble in prices.

Supply disruptions helped keep oil prices in triple digits until recently. They represent one big factor that could support prices now.

Take two particularly vulnerable countries: Libya and Venezuela. Libya’s output has fluctuated between virtually zero and 1.5 million barrels a day since 2011. In November, it produced 690,000 barrels a day. Say it went back to the lows of early summer and held at that level next year. That would be around half Libya’s average output so far this year, meaning around 250,000 barrels less across the whole of 2015.

For Venezuela, lower oil revenue adds to existing political and economic tensions. So far this year, Venezuela has produced about 2.5 million barrels a day. Back in 2003, amid a general strike, output dropped briefly to less than one million barrels a day, yet still averaged just under 2.3 million barrels a day that year.

Say a crisis took half a million barrels a day of Venezuelan oil off the market, combining with Libya to take out 750,000 altogether. The International Energy Agency forecasts that global oil inventories will build by 300 million barrels in the first half of 2015. Such disruptions would knock almost half off that-but still wouldn’t prevent stocks from building.

Granted, disruptions could be even more pronounced as falling oil prices destabilize various regimes-they’re called “supply shocks” for a reason. But maybe not: Libya’s output surprised in the other direction this year, after all.

The bigger point for Russia, and anyone else banking on higher oil prices, is that delivering shocks might well jolt prices momentarily. But as the shale boom and energy conservation efforts of the past half-decade have shown, disruption can cut both ways.