Libyan Oil Spike
Research for Online Investors

by John Dalt

2/22/11

The big news today is the Middle East crisis spreading to Libya.  The Libyan situation is a continuation of the protests that brought down the government of Tunisia and then Egypt in the past month.

The unrest in the Middle East has been peaceful until the citizens of Libya thought they could boot Col. Gadhafi out.  Tunisian and Egyptian leaders left power relatively quickly, without turning their military lose on the protesters.  Gadhafi has no qualms about bloodshed.

Gadhafi ordered mercenary soldiers and aircraft to open fire on demonstrators on Monday.  There are reports of up to 200 deaths and bodies left lying in the streets.

He went on television this morning for over an hour, telling Libya’s population that he would not leave.  He is going to stay and “protect” the government from those that would seek to overthrow him.  He promised to “cleanse Libya” by going “house to house” to find the “gangs” and “terrorists.”

Gadhafi took power in Libya in 1969. He has been erratic from the beginning. The U.S. listed Libya as a “terrorist nation” in 1992. This was after the country’s agents were implicated in the 1988 bombing of Pan Am flight 93 over Lockerbie, Scotland. 270 people were killed when a bomb blew up the plane. The sanctions were lifted in 2004 and Libya was taken off the state terrorism sponsor list in 2006 after the government cooperated in the Pan Am case and disbanded its nuclear program.

The lifting of sanctions allowed U.S. companies to work in Libya. Because the sanctions were in place for 16 years, Libya’s oil fields are not fully developed. Their production is all onshore and hence easier to interrupt. Libya produces less than 2% of the world’s crude oil at 1.65 million barrels per day. They also export natural gas and other liquid petroleum products. Oil traders are nervous that Iran may be behind the unrest in Libya and that it may spread to Saudi Arabia from Bahrain.

IHS Global Insight reported that production has been curtailed at the Nafoora oil field and the al-Zuqayya tribe has threatened to disrupt supplies in Eastern Libya.  This morning Libya declared “Force Majeure” on fuel deliveries.  Reports confirm that 6% of Libya’s oil production has been shut in by strikes and work stoppages.  Libya's potential impact on future oil production is factored into the concern because the country has the world’s largest pool of undeveloped oil reserves at 44 billion barrels.

The International Energy Agency (IEA) says the unrest in Libya has caused 50,000 barrels of crude to be pulled off the market.  The IEA may pull crude oil from its 1.6 billion barrel reserve held by members.  Saudi Arabia’s oil minister, Ali al-Naimi said his country would increase production but he saw no long-term effects due to Libya’s situation.  Italy, Germany, France and Spain are Libya’s largest customers.

Crude oil, gold, silver are up this morning along with most oil companies. There may be more news in the oil patch to drive crude oil higher. This is a market hanging on the latest headline. Most other equities are down sharply. We reached a point where the market needed a breather to consolidate the gains from the last month. Where do we go from here? Watch the price of oil and the reaction to it if the price continues higher. Analysts may start to question the ability of the world's economies to continue to improve if energy prices spike.

Also, be cautious of precious metals at these prices. They are spiking now on the Middle East news, but if the uncertainty is removed the price could quickly drop. Also, when equities fall hard and continue falling, EVERYTHING gets sold, even gold and silver. When traders have to raise money to cover margin calls, precious metals may be the last to be sold, but they will be sold. Many farm commodities are down this morning. I heard one talking head voice the concern that higher oil prices may hurt the demand for food.

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The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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