Oil prices recovered modestly in European session after the sharp selloff yesterday. While Saudi Arabia, the US and the IEA pledged to replace Libya's oil supplies, the risk remains there as the grades of oil produced by the countries differ. The spread between WTI and Brent has stayed above 14 as European oil markets are more affected by oil output disruption. In our opinion, while a risk premium should be attached to Brent crude for some time, the price should stay below 120 if the unrest in the MENA region does not spread to other oil producers, especially Saudi Arabia.
Oil supply disruption may be supportive for oil fundamentals in a sense that the ample spare capacity held by the OPEC can be utilized. Libya's oil output takes up around 25% of OPEC's spare capacity of 4.65M bpd and if production in Algeria, another African country thought to be at risk, is also affected, more than half of the cartel's total spare capacity will be in use.
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