Friday, June 25, 2004

Another Unwelcome Straw
Just when the oil markets start to settle down, and prices head back in the direction of $30, we get this. I guess if you're a Norwegian oilworker, you might think now is an optimal time to achieve your goals through a strike. For the rest of us, the timing couldn't be worse.

So far, the strike has taken 300-500,000 barrels/day of Norwegian crude off line. But if it expands, the entire sector is threatened, exceeding 3 million barrels per day, essentially all of it produced from offshore platforms in the North Sea. Although the US typically only receives about 150,000 barrels/day of Norwegian oil, this strike could have a disproportionate impact on US consumers for several reasons:
- Most of Norway's production is very high quality, low in sulfur and containing a high proportion of gasoline and diesel, and requires less intensive refining.
- With US refineries running essentially flat out, all our incremental gasoline supplies must be imported. To the degree that the suppliers of these imports are running Norwegian oil, the strike will further handicap them in delivering cargoes to the US.
- Although Saudi Arabia has pledged an increase of 2.5 million barrels per day, it will take a month or two for this extra production to gear up, and another month or two for it to reach market. In contrast, oil from the North Sea reaches European refineries in a few days and the US in about two weeks. That means there will be a lag before other supplies can make up for the lost Norwegian oil.

The net result will keep crude oil prices high, longer, and put further pressure on the US gasoline market. Hardly good news in the peak summer driving months.

Addendum: I saw on Saturday that the Norwegian government stepped in to end the strike and prevent it from affecting the rest of the country's oil fields. The market dodged a bullet, here.

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