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The Norwegian Oil Strike – Commentary 06/07/2012

Published Friday, July 6th, 2012

The implications of the Norwegian oil workers’ strike are clear. Whilst the flat price is affected by economic and geopolitical concerns the structure of the Brent market is undoubtedly supported by the strike. ICE front-month Brent spread has strengthened from -38 cents/bbl on June 25, when the strike started to +43 cents/bbl at the time of writing, whilst the WTI/Brent arb has weakened from $-11.80/bbl to $-13.50/bbl.

The trigger for the trade unions to decide exercising their legal right to go on strike was that the Norwegian Oil Industry Association (OLF) has not been willing to negotiate an early retirement age (62 instead of the standard 67) for offshore workers.

Consequently, the strike led to a fall in Norwegian oil output during the last two weeks by around 13-15%. Since no progress has been made in the negotiations the OLF decided to lock out all of the offshore workers on the Continental Shelf effective July 10. It involves 6,515 workers and practically would mean that most of the country’s 1.6 mbpd output would be shut. Since the deadlock has an impact on one of the grades that is part of the European benchmark BFOE (it is Oseberg) the relative strength of the Brent structure is completely understandable. July loadings are being delayed and the August loading programme is not out yet adding to the uncertainty.

The lockout news, however bullish at first sight, might have negative implications. The Norwegian government has, so far, refused to intervene but since shutting down the country’s full production is unlikely and unprecedented, it might force them to step in and settle the issue. If or when that happens, the trend of the last two weeks could easily reverse and we might see some weakening of the Brent structure.

Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.