The Oil & Gas Industry

Third Quarter

Crude Prices

Volatility is a continuing trend for crude prices in 2011. The year started with an all-around positive outlook for the world economy. The crude prices inched closer to the $90 to $100 mark backed by pure demand fundamentals of the world economy. With the onset of unrest in the Middle East, crude prices started peaking on largely speculative supply disruption considerations.

Unrest in Egypt was largely a threat to one of the most important channels of crude transportation. Meanwhile, civil unrest in Bahrain, Syria and Yemen had the potential to knock-off about 500,000 barrels per day (bbl/d) of crude supply from the market.
The issues in these countries had no major impact, however. The biggest threat came from the civil war in neighboring Libya, which in real terms, took nearly 1.35 million bbl/d of supply. The Libya disruption had much wider implications because of the light, sweet nature of its crude blends. Libya’s crude enjoyed a wider premium as blending crude for more sour crudes around the world.

To placate the market and rein in the spiraling prices of crude, the International Energy Agency (IEA) declared the release of 60 million barrels of oil from the strategic reserves of its 28 member nations. This drastic measure temporarily reduced the price of oil by $7 per barrel, but at the same time, highlighted a significant supply constraint.

It was apparent that IEA was unable to fill the gap of Libyan supply by increasing the non-Organization of Petroleum Exporting Countries (OPEC) production. Not surprisingly, crude prices had begun an upward momentum after a minor pause.

The third quarter started with much gusto for crude prices but ended on a more subdued note. By the close of August 2011, the end was apparently in sight for the Libyan conflict, and preparations to restore supply started in full swing.

The biggest hit on crude prices came from the more fundamental issue of declining demand. The third quarter 2011 saw some of the worst financial performances from the U.S. and Europe, raising concerns of a second double dip recession. The crude prices reached $105 by the end of August 2011—a stark decline of 19 percent from the year high.