Libyan situation drags on, geopolitics trump supply numbers

March 1, 2011 06:00 PM

Discovery is poetry to genius.

William Mocca

The chaos and fighting continues in Libya as Gaddafi loyalists retook a key oil port overnight. Forces loyal to Gaddafi regained control of a key oil port on the coast of the rebel-held eastern half of the country. Gaddafi and the forces loyal to him seemed to have gained ground but may be pushing the country to an all out civil war. It is now looking like the turmoil in Libya is going to last for a much longer period of time than expected just last week and the likelihood of a civil war is also increasing. Even though Gaddafi has lost his very tight grip on the country he is still surviving and hanging onto to power at the moment. The United States has moved ships and military personal into the region in the event they are needed to support the opposition group. Sanctions have been placed on Gaddafi and his family and close circle but sanctions tend to have little if any impact in these kind of situations.

In the rest of the region the risk of contagion is still a major overhang in the market sentiment as the Saudi Arabia's stock market declined for the 13th session as concern rises over the planned day of rage in Saudi Arabia on March 11 and March 20. Tensions still exist in Yemen, Bahrain. Algeria and Iran where several opposition leaders have recently been detained as the Iranian government works to aggressively put down any attempt to protest that autocratic government. The situation in North Africa and the Middle East is more and more looking like it will be around for an extended period of time resulting in a high degree of uncertainty as to the overall supply of oil from this very important oil region. As such we can expect to see the risk premium remaining in the price of oil throughout the process for however long it takes (another unknown). On a daily basis the risk premium is going to rise and fall with each 30 second news snippet that hits the media airwaves discussing conditions in any of the affected countries with any negative Iranian or Saudi news likely to result in huge price moves due their importance as major oil producing nations as well as power players in the region. For the moment the world has already built in a risk premium that is reflective of a modest level of oil flow interruption (from Libya) and is beginning to add to the risk premium in anticipating that we will see a spread to other key oil producers and result in some sort of larger oil supply interruption.

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