Beyond Libya: Four factors affecting oil prices

Oil prices changed little despite high trading volume on Friday, as oil traders eyed developments in four nations: Libya, Yemen, China, and Japan.

Oil markets churned on Friday as traders tried to figure out how oil's price would be affected by four different international events: the situation in Libya, violence flaring up in Yemen, the continuing nuclear drama in Japan, and the Chinese government's decision to raise interest rates.

With so much uncertainty, many traders decided to lighten their positions going into the weekend – but others decided that oil prices will rise, so increased their position. The result was high volume with little price movement. By 1 p.m., the price of oil was very slightly down at $100.69 per barrel on the New York Mercantile Exchange in New York.

Oil prices have stayed around $100 per barrel for the past two weeks, reaching a high of $105.44 on March 7. International developments appear to have stalled oil's rising prices as market analysts try to decipher the impact of recent events.

“There is so much happening, there is so much more historic up-and-down risk than I have ever seen before,” says Phil Flynn, senior market analyst at PFG Best Research in Chicago.

Libya

Many traders kept their eyes on the shifts taking place in Libya. Shortly after the UN authorized military action against Col. Muammar Qaddafi, the Libyan foreign minister declared a unilateral cease-fire.

“It reminds me of Saddam Hussein (former leader of Iraq), who knew how to game the UN diplomatic corps,” says John Kilduff, an energy analyst and founder of Again Capital, a New York-based hedge fund that focuses on energy. “It will maintain the uncertainty.”

No matter what happens in Libya over the short term, Mr. Flynn expects Libyan oil will remain off the markets. “To me, if Qaddafi does miraculously stay in power, the world will hit him with sanctions and no one will be able to buy their oil.”

Before the uprising, Libya was pumping about 1.65 million barrels of oil – mostly light crude – each day, most of it going to European nations where it was made into low-sulfur diesel and gasoline.

Oil analysts believe most of the Libyan production has been made up by Saudi Arabia.

“They had been increasing their production even before the Libyan revolution,” says Erik Kreil, an analyst at the Energy Information Administration in Washington.

Although much of the Saudi crude was geared more towards industrial uses, the Saudis have indicated they will blend whatever mix their customers want, says Mr. Kreil.

Yemen

Although Yemen is not a significant producer of oil, news of violence in the country’s capital, Sana, was also roiling the oil markets.

“It’s another problematic nation in the region,” says Kilduff. “It borders Saudi Arabia and is important from a regional perspective.”

China

In another development watched by the oil markets, China’s central bank raised reserve requirements, in an effort to slow inflation. This will slow oil demand to only a minor degree, says Donald Straszheim, senior managing director at ISI Group, which does China research, in Santa Monica, Calif.

Mr. Straszheim estimates China currently imports about 5 million barrels of oil per day. China's strong economic growth in recent years has increased its demand for oil about 500,000 barrels of oil per day, each year.

“If the economy grows more slowly, which I think it will, that will lower annual demand growth to 400,000 barrels of oil a day, which in the broad scheme of things is just a rounding error,” he says.

Japan

Oil traders are also watching the events in Japan. If emergency crews cannot stop the release of radiation from the damaged reactors, it would lower demand for oil, says Flynn since it would delay reconstruction after the earthquake and tsunami. On the other hand, if the Japanese are finally able to gain control over their nuclear reactors, it would add pressure on the price of oil to rise, Flynn says.