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Libyan Supply Fears Dampen Oil Price Optimism

Oil Rig

It appears that oil markets have stabilized over the Christmas holidays, with light trading and low volatility, while fears of a Libyan supply increase are adding downward pressure to oil prices.

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Oil prices remained mostly stable this week on light trading and few major price-altering headlines. However, some weakness in the rally emerged as fears over restored Libyan supply weighed on prices. The influence of the OPEC production cut appears to have all but left the markets now, with trading slowing down into the new year.

Libyan oil pipelines reopened. Libya’s oil output is set to surge in the next few months as long shuttered pipelines restart operations. The pipelines can carry 270,000 bpd, which is equivalent to almost half of the country’s current output. The restart of operations could bring lost output online within the next three months, the National Oil Company says. Great news for Libya, but bad news for OPEC. Libya is exempt from any cuts as part of the November agreement, and if Libya succeeds in adding back 270,000 bpd, it would wipe out roughly a quarter of the OPEC reductions. Additionally, that comes on top of nearly 300,000 bpd the country has added since this past summer, taking output up to 600,000 bpd.

Keystone XL back on the table. Canadian Prime Minister Justin Trudeau said that he talked with President-elect Donald Trump, who expressed his support for reviving the Keystone XL Pipeline. Trudeau supports the pipeline. At the same time, Trudeau said that Canada could take advantage of the vacuum left by the U.S. backing off support for renewable energy, which would allow Canada to attract more green tech investment.

New U.S. LNG export terminal approved. U.S. federal regulators issued a crucial permit for a new LNG export terminal along the U.S. Gulf Coast. The Golden Pass LNG facility was originally an import terminal but has undergone a $10 billion retrofit to turn it around for export. The project is owned by Qatar Petroleum (70 percent), along with smaller stakes held by ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP). The facility will be able to export 2 billion cubic feet of gas per day.

Mexico to liberalize gasoline prices. After eight decades of government controlled pricing, Mexico is set to liberalize gasoline prices, letting the markets dictate price levels. Lifting price controls will likely lead to a spike in prices, which could result in a backlash. The removal of controls will start in some parts of the country in March, and spread to other areas over time. “All this could be a good thing if the people see some benefit when oil prices go down,” a truck driver in Mexico City told The Wall Street Journal. “If not, this will only be a bad joke.”

Industry standardization could save costs. Offshore oil companies could cut exploration costs by one third if they simply agreed to industry-wide standards for equipment, according to the International Marine Contractors Association. As it stands, offshore drilling projects typically use tailor-made equipment, inflating costs across the sector. At a time when everyone is trying to reduce drilling costs, standardization appears to be low hanging fruit. The onshore shale industry has already largely standardized equipment, leading to a sharp fall in the cost of production. The offshore sector should follow suit. A group of 10 oil majors set up a group last year to explore this possibility. Related: Saudis Up Oil Price Outlook, See Budget Deficit Shrink

Anadarko to sell Marcellus assets to focus on Permian. Anadarko Petroleum (NYSE: APC) announced its decision to sell off natural gas fields in Pennsylvania’s Marcellus Shale for $1.2 billion. The company will use the proceeds and smaller footprint to expand in the booming oil fields of the Permian Basin in Texas and the DJ Basin in Colorado. The move is a sign of the times: more and more shale companies are pulling capital out of less competitive areas and concentrating funds in a few prized shale basins.

Saudi Arabia expects oil revenue to rise by 47 percent. Rising oil prices will help Saudi Arabia take in 47 percent more revenue from oil sales even as it cuts production, the kingdom says. Intriguingly, non-oil revenue will rise by 6.5 percent, an area of the economy that the government is hoping to grow over the long-term.

Dollar strength stalls. The dollar has rallied to the strongest level in more than a decade but leveled off this week. The strong dollar is keeping a lid on oil prices, but the markets are now seeing the gains as reaching their limits. "We have had a big rally and we are due for a breather," Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments in Minneapolis, told Reuters. The dollar will be at a crossroads in the coming year – optimism around economic growth in the new administration could bump up against more interest rate increases and possible inflation from overheating.

By Evan Kelly of Oilprice.com




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