February 22, 2011 | In: Energy
What Should Be the Price of Oil if Libyan Exports Are Halted?
As you may already know, there is a lot of political instability all over the MENA region, this time in Libya, the country with the largest oil reserves in Africa. As an investor who’s (probably like anyone else) currently trading oil, I was very interested to know how much oil should jump should all Libya stops exporting oil for one reason or the other. Because of this, I made a little research to estimate what is a realistic price for oil (NYMEX) should this occur.
Prior to this crisis, NYMEX Oil delivery for March closed at $89.71 last Friday, after being already affected by the instability in Egypt, and then in Bahrain (not to mention other tensions in the Middle East). A week earlier it was in the mid 80s. At this very moment, it is currently being traded at around $94.70, up $5 from Friday (yesterday was a holiday). Let’s assess Libya from an oil production perspective.
Libya produces 1.1 million barrels a day, compared to a world production of around 70 million barrels. This means that the Libyan contribution to the world oil is 1.1/70 = 1.5%, which means, as a worst case scenario, the world will experience a demand of another 1.5%, which means that the oil price should go up only 1.5% (By the way, I’m sure that OPEC will easily cover for this 1.5%), so this makes the realistic oil price, taking into consideration the global instability (in particular in the Middle East), around $91.35. The rest is pure speculation.
But then again, as many investors say (including me), buy the rumor, sell the news. But you know what, I’m selling nearly all my HOUs and I’m buying some HODs by the end of the day today. The former is way overvalued, and the latter is way undervalued.
Tomorrow will be more fun…