Oil price held high by supply disruptions A Libyan oil terminal burns during the civil war. Security troubles continue to make life difficult for business This year was meant to mark a turning point for the oil market. An energy revolution that has been gathering pace in North America was expected to reduce the world's dependence on crude oil from the Opec cartel of producers. As technological advances unlocked ever more oil from Canada's oil sands and shale rock formations in the US, demand for oil from Saudi Arabia in particular was expected to fall, paving the way for lower prices and muted volatility. Disrputions climbing fast One part of the narrative has worked out. In the US oil output grew by the most on record last year. Yet Saudi Arabia is producing almost 10m barrels a day, an extremely high figure by historical standards. And oil prices remain high. The reason is simple: supply disruptions. From oil theft in Nigeria to the closure of ports in Libya and transit disputes in South Sudan, unplanned outages are on the rise. By September they are set to hit a 10-year high of 3.4m barrels a day, according to Energy Aspects, a consultancy. That is almost 4 per cent of global demand. It is also more than double the combined output of the Bakken and Eagle Ford shale formations - the twin centres of the US oil revolution - underlining how rising North American supplies are being overwhelmed by problems elsewhere. At $107 a barrel, Brent crude oil, the global benchmark, is well above the unofficial $100 price target for Opec. But some analysts argue it is still more likely to rise than fall, given the amount of oil production that is offline. The oil market is a lot tighter than most people think. By focusing on rising US shale output and falling demand, the market is overlooking the extent of supply disruptions," says David Wech, an analyst at JBC Energy in Vienna. Other analysts are more relaxed, arguing the disruptions are only temporary, while supply additions from North America will continue for years to come. "These outages are significant, but it doesn't as yet raise alarm bells because in most cases there is quite a potential for improvement," says Patrick Gibson, global oil supply analyst at Wood Mackenzie. In South Sudan, for example, where up to 300,000 b/d of capacity has been shut in, the African Union is trying to mediate an agreement with neighbouring North Sudan that would allow more oil to flow to export markets. In Iraq, which will account for at least 500,000 b/d of disruptions in September when it begins work to upgrade a southern port, there is the potential for new fields to come online this year or early next, boosting production. Only in Syria, where 300,000 b/d of production is offline because of the country's civil war, and Iran, where US-led sanctions have reduced output by about 1m b/d, is there little prospect of immediate improvement. Other analysts point out that the physical oil market, where refiners, producers and traders buy and sell specific cargoes of crude, has already factored in the unusually high level of disruptions. For example, Saudi Arabia and other Gulf producers have been steadily raising the price of their exports to Asia and Europe for several months, while Russia's Urals crude oil has been trading at a record premium to North Sea oil. Both trends reflect a shortage of readily available replacements for the medium heavy crude oil produced in Iran and Iraq in particular. In futures markets, where contracts linked to Brent and West Texas Intermediate oil of the US are traded, hedge funds and other financial investors have also built large long positions, providing support for spot prices. "Supply disruptions are already priced in," says a senior trader at a large energy company. Yet the extent of supply disruption is still huge and Antoine Halff, head of oil research at the International Energy Agency, says analysts and policy makers should be paying closer attention, even if prices don't rise. One reason they may not be is the scattered nature of disruptions. This year has been characterised by a slow drip of outages in countries that are geographically scattered and not linked politically, unlike the problems in Libya in 2011 or Iran in 2012, which appeared to have regional implications. "During the Arab Spring there was a real fear disruption could spread to other producers in the Middle East, but that is not the sense today," says Richard Mallinson, senior policy analyst at Energy Aspects. Security concerns are growing again, however. In Libya, armed militias have closed down ports, pushing exports to an 18 month low, while in Iraq attacks on a pipeline to Turkey have reduced exports from the country's northern oilfields to a trickle. Helima Croft, a former CIA analyst, now at Barclays, says the prospect of an attack on one of Iraq's much larger southern oilfields, keeps her up at night. Of Libya, she says: "Production came back much quicker than we expected after the Arab Spring and we got a little cocky. Now we're dealing with the consequences of leaving a country flush with weapons with no plan to secure them. While the supply problems alone have not been enough to push the oil price beyond $110 a barrel, a sharper shock to the market akin to Libya in 2011, certainly would.