Goldman Sachs: Expect Oil Rationing In Poor Nations Soon

Three weeks ago when we first commented on the developments taking place in the Middle East and North Africa we highlighted the risk of contagion (see

Contagion risk moves markets, but physical risks remain low, published January 31, 2011). We noted that countries with low income levels, high inflation and unemployment in politically less stable regions would be more susceptible to contagion.  

By the same token, we argued that the more affluent and politically stable GCC economies in the Gulf would be more immune.  

The contagion risk has to a large extent materialized. Social unrest has indeed spread from Tunisia and Egypt over to other parts of the region. Jordan, Yemen and more recently Libya have been impacted and the situations in Yemen and Libya appear to be particularly unstable. However, there are a number of economies with similar traits that could be susceptible to further contagion, namely Algeria, Syria and in the extreme maybe even Iran. 

In contrast, the more prosperous Gulf region has been relatively stable, with no sign of popular discontent in Saudi Arabia, the UAE, Qatar, Oman and Kuwait. There have been mass demonstrations in Bahrain. But those were mainly sectarian in nature (led by the Shia majority) and less socio-economic. And the situation in Bahrain looks more stable.  

Events in Libya leave only a small buffer against further contagion 

This means that there may still be some risk of further supply disruptions for which the market now has a much smaller buffer to protect itself from. We estimate that OPECcurrently holds 2.5-3.0 million b/d of “effective” spare production capacity. While this can accommodate an extended loss of all of Libyan exports, it could not accommodate another production disruption should the contagion spread, and it is this risk that we believe has and will continue to drive prices in the near-term. 

While these events only modestly pull forward the return to a structural bull market that we saw occurring in 2H2011 and 2012, the contagion risk premium will likely dominate the fundamental picture in the near-term, creating significant upside risks to our forecasts.  

Further, given the high quality nature of the light-sweet crude oil currently being shut in, this will also likely widen light-heavy spreads, particularly should Saudi Arabia have toreplace these lost barrels with heavy oil. While the timing of how long these disruptions will last is entirely uncertain at this point, the evacuation of the crews means even if normalcy is restored today, it will take several weeks to restore the shut-in production. Historically, these types of disruptions last for several months with production rarely ever restored to pre-crisis levels as field damage is typically incurred and expertise is lost. With Libya, however, the fields are of the highest quality and very easy to operate, which suggests once the current civil unrest settles down, production can be restored quickly with little or no long-term losses.