Europe’s debt worries counter Libya’s production shortfall

10 March 2011

Spain downgrade dampens optimism of economic recovery

The 12-crude basket of exports from the member states of the international oil producers group Opec rose to $109.96 a barrel on 9 March, the last date for which prices were available, up from $108.27 on 3 March.

In Europe, Brent crude prices fell for a second week, finishing at $114.650 a barrel at the end of trading on 10 March, down $116.00 a barrel on 3 March.

The US’ benchmark October West Texas Intermediate (WTI) contract was trading at $103.52 a barrel on 10 March, slightly down from $101.93 a barrel on 3 March.

Oil traded lower towards the week ending 10 March, driven by worries that Europe’s debt problems could spanner demand, countering the impact of continued fighting in Libya.

Stockmarkets across Europe reeled from the downgrade of Spain’s sovereign rating by credit rating agency Moodys, leading to fears that the economic recovery will be stymied by rising debt costs.

The armed conflict between forces loyal to Libyan leader Muammer Qaddafi and opposition raged on, and for the first time oil facilities were destroyed in the fighting, with storage tanks in Ras Lanuf, close to the Es Sider terminal, went up in smoke.

While Libya is likely to impact the oil market for the foreseeable future, the possible contagion to neighbouring countries, and Saudi Arabia in particular, have even greater potential to disrupt the market.

“Circumstances are such that what are relatively unlikely tail-end outcomes in Saudi Arabia are probably having a greater impact on oil market perceptions at this time than the actual supply loss and clear damage to the oil sector in Libya,” say analysts at Barcap.

This is particularly true as Saudi Arabia has the world’s largest amount of spare capacity, and will already have to compensate for the decline in Libyan production.

Crude stockpiles in the US have fallen to 1,771 million barrels in the week ending 25 February, down from 1,778 million barrels a week earlier, according to the US Energy Department, extending the drop in demand to eight consecutive weeks.

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