Abu Dhabi, UAETuesday 31 March 2020

Oil spike likely as markets reopen after Libyan supply disruption

Closure of ports in eastern Libya cut 1.1 million barrels per day, or 1.1 per cent of global production, from the market

Closure of ports in eastern Libya cut 1.1 million barrels per day from the global market. AP
Closure of ports in eastern Libya cut 1.1 million barrels per day from the global market. AP

The closure of ports in Eastern Libya on Saturday could cause prices to rise once global oil markets resume trading on Monday, but any increase could be short-lived if a political agreement between warring factions in the north African country is reached at a summit currently under way in Berlin, according to analysts.

Libya's National Oil Company declared a force majeure - unforeseeable circumstances that prevent fulfilment of a contract - after ports used to export oil were stormed by Eastern Libyan tribesman on Saturday. The company said the management of a number of its subsidiaries were instructed "to stop oil exports from Brega, Ras Lanuf, Hariga, Zueitina, and Sidra ports", meaning about 800,000 barrels per day, equating to $55 million in revenue, was removed from the market. On Sunday, a spokesman for the tribesmen also claimed to have closed two more fields in the south - El Shahara and El Feel, according to Reuters. This would bring the total amount of supply disrupted to more than 1.1 million barrels.

Oil prices closed lower on Friday, with Brent crude down 0.2 per cent at $64.85 per barrel and West Texas Intermediate 0.9 per cent lower at $58.54 per barrel. A sharp increase in price is likely once trading recommences on Monday, given the scale of disruption to supply, analysts told The National.

"Oil markets are likely to rally by at least 5 per cent when the markets open for trading. If Saudi Arabia doesn’t compensate for the lost oil production, we could see a sustained up[wards] move," said Arun Leslie John, chief market analyst at Dubai-based Century Financial.

Brent crude prices rose more than 20 per cent in 2019 as members of the Opec+ alliance decided to tighten supply towards the end of the year. However, spikes experienced during the year as attacks on tankers in the Strait of Hormuz in May and on Saudi Aramco facilities quickly rescinded again as investors shrugged off supply risk, focusing instead on prospects for demand growth.

"Oil prices tend to rise on oil outages. And the disrupted volume is likely to be around 1.1 per cent of global production," said Giovanni Staunovo, a commodities analyst with UBS.

"It could send a shock to the markets," said Edward Bell, a commodities analyst with Dubai's biggest lender, Emirates NBD. "If we're talking 500,000-800,000 bpd taken out of the market, that does impact oil markets in the short term if there's not an immediate supplier to replace it. The longer term impact from this will be dependent on the political future for Libya," he added.

A draft version of the communique prepared by global leaders attending the Berlin summit called for all parties to refrain from hostilities against oil facilities, Reuters reported. It also recognised the national oil company as the only legitimate entity allowed to sell oil.

If a lasting resolution can be agreed, prices could fall as quickly as they're anticipated to rise, Mr Staunovo said.

"There is no damage to oil facilities. The disrupted production could return back at any time assuming there is an agreement between the different parties, which might limit the oil price upside."

Crude sold by Libya is usually exported to the Atlantic basin, "and that's a market that's not particularly short of crude right now," Mr Bell said.

"You've had a big increase in production from Norway in the last couple of weeks as the new [Johan Sverdrup] field has started producing there, you've had US oil exports consistently above 3 million barrels per day — pushing 3.5m per day. So it's a market in which space that is created by Libyan production could be pretty easily filled by others."

Most of Libya's oil export is light, sweet crude and "there is more than enough supply" in this segment market currently, said Ehsan Ul-Haq, an oil markets analyst with financial data company Refinitiv. He added that a warmer-than-normal winter and a strike at refineries in France had also both limited demand for oil in the Mediterranean.

"In the long-run, the market will be looking at deeper production cuts to see the impact on supply and at the US-China trade deal to see its implications for the global economy and oil demand. The present trade deal is only preliminary and we have to see how trade develops between two key economies," he said.

Updated: January 19, 2020 06:57 PM

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