Oil jumped 7.5% last night to hit its highest point in more than almost three years.
Brent crude is pushing $120. Texas is closing the gap, breaking $102.
Libya is the world's 12th biggest exporter of oil and has cut 400,000 barrels a day from its 1.6 million bpd output, according to Reuters.
But the CEO of ENI, the blue chip Italian oil company, says the loss is much higher... and that the market is missing 1.2 million barrels.
Much of Libya's oil producing regions in the east are in rebel hands, and Gaddafi continues his hardcore attacks on protesters.
Goldman Sachs must be long oil, saying "the spread of unrest to another producing country could create severe oil shortages and require demand rationing."
The Saudis won’t save us
Traditionally, Saudi Arabia has claimed it has an extra four million bpd of spare capacity. And during the current crisis, they've stated they will be able to supply enough oil to make up the difference in Libya...
It won't happen.
First of all, it is a well-known secret that Saudi Arabia has been overstating its reserves for years. Energy & Capital Editor Keith Kohl has covered the Saudis' potential short fall in depth.
Furthermore, King Abdullah is 86 years old and just returned home on Wednesday from a three-month medical leave. He is out of touch with the realities on the street.
The King recently announced he will give out $37 billion in new raises and other benefits to government workers in a clear bribe to keep his throne.
At the same time, there is a Facebook campaign pushing for a "day of rage" on March 11th. The protesters are seeking greater political freedom, rights for women, and a release of political prisoners.
The demand side
All of this chaos is going on in a world where the demand for energy is growing at twice the speed of IEA predictions.
China alone added a million barrels a day to demand last year, which currently stands at 87 million bpd globally. It is expected to hit 89 million bpd by the end of 2011.
Where this oil will come from is unknown, as four million bpd are going offline due to lower production of old wells...
Even if Saudi Arabia can pump to its full claimed capacity of 12.5 million bpd, it won’t be enough to cover the spread.
The Sharia don’t like it
Recent Wikileaks documents stated Saudi Arabia is just able to produce between eight and nine million bpd.
Russia is now the world’s largest exporter of oil.
The upshot of all this is that the Kingdom can’t prevent oil prices from going up even in a recession.
It won’t be able to supply more oil to cover growing demand from a resurging global economy, nor can it make up the difference from Libyan supplies.
On top of that, you have a great number of young, unemployed, and bitter people who are of Shiite heritage. Giving well-connected civil workers more money won’t suppress this group’s anger; they are alive at the margin.
The end around…
The obvious way to play the new rise is oil is to avoid the companies with a large presence in the Middle East — like Shell and ENI — and look for those that can supply oil to Europe and China without dealing with that part of the world.
This group includes Dragon Oil (DGO.L), which gapped up on the Libya news.
Dragon has more than 600 million barrels of oil in the Caspian Sea and Turkmenistan (as well as some in Yemen), and more than 3 trillion barrels of natural gas equivalent.
The most profitable way to play the supply disruptions in oil is to buy exploration companies — like the one I’ve been talking about in Mongolia — with up to 612 million barrels of oil. It’s up more than 900% since last year and will resume drilling in about a month.
Or buy Uranium companies, whose prices will continue to go up as new electric demands push nuclear power over conventional hydrocarbons.
As clear a trade as there is
There are several things I know with a high degree of confidence about this market: energy demand will continue to grow; supply is constrained and subject to shocks; and money supply is growing at a record pace globally.
You should be heavily invested in energy exploration companies. That's where the winners will be found in 2011.
Don’t miss the next wave…
All the best,
Editor, Energy & Capital
The Saudis Don't Like It originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.