West Shuns Libyan Crude

http://online.wsj.com/article/SB20001424052748703386704576186361903201684.html

Oil Price Spike Continues as Energy Giants, Banks Stop Trading With Gadhafi

By GUY CHAZAN And CAROLYN CUI

Big oil companies and Wall Street banks have stopped trading crude with Libya in response to sanctions against the country, threatening a near-shutdown of exports from the North African country and driving oil prices even higher.

Morgan Stanley, which buys Libyan oil for its clients, has stopped buying because of sanctions announced last month, according to a person familiar with the matter. ConocoPhillips Co. said it isn't exporting any of the 46,000 barrels a day of oil it normally produces in Libya. Exxon Mobil Corp. also said it is complying with the sanctions against Libya. A person familiar with BP PLC said the company wasn't currently doing any new trading deals in Libya.

These moves are putting further strains on an already-volatile oil market, threatening to send gasoline prices higher around the world. Oil is already trading at its highest level in 2½ years as antigovernment protests sweep further across the Middle East, and worries increase that disruptions could spread from Libya to bigger producers like Saudi Arabia and Iran. Crude futures rose $1.02 per barrel, or 1%, to $105.44 at the New York Mercantile Exchange on Monday.

U.S. retail gasoline prices rose 4.1% over the past week to average $3.52 per gallon, the highest since September 2008, compared with a little over $3 at the beginning of the year, the U.S. Energy Information Administration said on Monday.

Libya's normal oil production of 1.6 million barrels a day has dropped by about two-thirds since the uprising against Col. Moammar Gadhafi broke out last month, costing the North African nation more than $100 million in revenue each day. The sanctions could prevent some buyers from taking the remaining oil that is flowing out of the country, the world's 12th-largest oil exporter.

As Libyan government forces and rebels battled for control of the oil port of Ras Lanuf on Monday, fears of a protracted civil war grew and oil markets fretted about the prospect of a prolonged cut in crude shipments. The U.S. and its allies took steps on Monday to lay the groundwork for a possible military intervention, as members of Col. Gadhafi's inner circle debated whether their leader should give up power to end the conflict.

"It could take months for this situation to play itself out," said Peter Donovan, vice president of Vantage Trading, a New York-based oil brokerage firm. "It makes the market more vulnerable to any potential supply disruptions."

Crude-oil futures are up 25% in just three weeks, sparking worries about whether the soaring costs of oil will soon become a drag on the U.S. economy. Higher gasoline prices at the pump are taking a bigger bite out of consumers' budgets.

The Dow Jones Industrial Average dropped 79.85 points to 12090.03 on Monday and is down 1.4% in the past two trading days amid worries about the impact of rising oil prices.

The Organization of Petroleum Exporting Countries has said it is ready to make up any shortfall in Libyan production, but the message from the oil-producers' group Monday was that there was currently no need to increase output. In Doha, the oil minister of Qatar, Mohammed Saleh Al Sada, said OPEC was watching the situation in Libya and would step in if necessary, but there was "no need for nervousness" about supply. "[Oil] supply and stocks are at comfortable levels," he said. In an interview in Houston, Angola's oil minister, José Maria Botelho de Vasconcelos, said he is "concerned" by the higher prices, though he maintained that the oil market is well supplied.

Saudi Arabia, the world's largest exporter, is so far the only OPEC member that has responded by saying it would pump more oil. But traders say the United Arab Emirates have also been ramping up production over the past three months, largely in response to Asian demand. The UAE was producing 2.2 million barrels a day in January this year and 2.3 million barrels a day in February.

Mr. Al Sada said OPEC, which produces more than a third of the oil the world consumes, was evaluating whether it needs to meet ahead of its scheduled gathering in June.

Part of the problem for markets is that Libyan oil is light and sweet—low in density and levels of sulfur—and is hard to replace. Light, sweet crude is more desirable as it yields more gasoline and is easy to process.

Italy, France, China, Germany and Spain are the largest buyers of Libyan oil, according to the U.S. Department of Energy. Some refineries in those nations will have to search for new sources of supply to make up for the lost Libyan crude, which could send oil prices higher in other markets.

Even if the bulk of the lost Libyan oil is made up by production in Saudi Arabia, some refineries can only process light sweet crude and have to turn to a handful of other countries for supplies, including Nigeria and Algeria, which are themselves the subject of some popular unrest.

In Nigeria, for example, there are some doubts as to whether Africa's biggest oil exporter can maintain exports at their current level of about 2.3 million barrels a day in the run-up to elections in April, which many observers warn could provoke unrest.

The U.S. is a small customer of Libya, but it is a big importer of Algerian and Nigerian oil, and could face higher prices if demand for oil from those two countries rises.

Market observers are also becoming increasingly nervous about Saudi Arabia after the Saudi government banned its citizens from going ahead with a rally planned for Friday. A disruption of supplies from such a key exporter would send a new shock through oil markets.

The United Nations, the U.S. and European Union have imposed far-reaching sanctions against the Libyan regime, including asset freezes, prohibitions of transactions related to Libya and restrictions on exports. Still, some companies are still trading with Libya.

Oil markets have been spooked by fighting that has tended to play out near oil facilities such as the Ras Lanuf oil terminal, in eastern Libya. The complex is currently in the hands of rebels, although Libyan warplanes have launched air strikes near rebel positions on the outskirts of the town, according to witnesses.

The fact that many of Libya's key oil installations are in the hands of rebels creates a headache for oil companies already hit by the trade sanctions adopted last month against Libya. The violence is deterring tankers from loading cargoes in Libyan ports, and even when they succeed, it is unclear who they should be paying for the crude—the opposition forces or the Gadhafi regime.

"There are insurance and ownership considerations and they're going to exacerbate the production problem the Libyans already have," said Lawrence Eagles, an oil analyst at J.P. Morgan Chase & Co. He said until those issues are ironed out, oil markets will have to adjust to an export shortfall of about one million barrels per day.

—Benoit Faucon and Angel Gonzalez contributed
to this article.