Oil prices are falling once again, and WTI was flirting with sub-$40 per barrel during midday trading on Monday. The story has been the same for weeks: extraordinary high levels of crude oil and refined product inventories are weighing on the market, and demand has failed to soak up all of the excess.
But other threats to the oil price rally keep cropping up. The latest comes from Libya, which could finally restart long-disrupted oil supplies from shuttered ports. In a press release, Libya’s National Oil Corporation (NOC) said that it would “begin working” with the unity government to bring back some lost oil exports. The statement says that Libya’s oil production could reach 900,000 barrels per day by the end of 2016, or up roughly 600,000 barrels per day from current levels.
Several major ports have been shut down since 2014, but their reopening is now tantalizingly close. The unity government reached an agreement with the petroleum facilities guard that could lead to a restart of operations. “I call now on other groups that are using the blockade as a tactic to let Libya’s oil flow freely. In the West of Libya, 400,000 b/d of production is shut in at the Sharara and El-Feel fields. The cost to the country is plain: tens of billions of dollars in lost revenue, and the collapse of our social fabric,” the NOC said in a statement.
The NOC recognized that hurdles remain. “We need to be clear there are still big military, political and legal obstacles that must be resolved. NOC will immediately start technical works, and we will mobilize workers as quickly as possible. On top of that, NOC will open discussions with our international oil company partners to indemnify NOC from liability before lifting the force majeure,” the company said in a statement. Related: Oil Flirts With Bear Market As Short Positions Surge Most In 10 Years Time
The agreement is positive for Libya, but should be taken with a grain of salt. It was only a few days ago that the NOC’s chairman criticized the deal between the government and guards, though it appears that his concerns have now been assuaged. And even though an agreement to resume operations at the key ports of Ras Lanuf, Es Sider and Zueitina is in hand, the supplies at the upstream oilfields need to flow, a development that falls outside of the deal. “A separate round of negotiations seems to be required to reopen the fields. Plus, even the NOC statement suggests that force majeure will not be lifted immediately and hence there is no increase in exports just yet.” Richard Mallinson, an analyst at Energy Aspects Ltd., told Bloomberg.
If successful, the return of 600,000 barrels per day of oil production would be very bearish for crude markets. That would be the equivalent of about half of the lost production from U.S. shale over the past year and a half. But the estimate is likely overly-optimistic.
“Libya has now been into years of zero maintenance for the infrastructure so there’s a concern about the infrastructure damage,” Bill Farren-Price, CEO at consultant Petroleum Policy Intelligence, said in an interview with Bloomberg. “There are a few million barrels in the storage in some of the ports, so not very much really. We just don’t see the conditions as being positive and supportive of a long term recovery.” Related: Oil Prices Fall Below $40 As OPEC Ramps Up Output
Nevertheless, Libyan oil looms over the market as another potential ceiling on oil prices. WTI and Brent have fallen back close to $40 per barrel, amid deepening fears of oversupply. Gasoline and crude oil inventories remain too high, particularly since the peak summer demand season is coming to an end.
The most recent bearish catalysts were another uptick in the U.S. rig count on Friday (an increase of 3 oil rigs), plus data from OPEC showing higher production. In fact OPEC’s oil production may have hit an all-time high in July. Hedge funds and money managers are becoming increasingly bearish on crude oil, liquidating long bets and purchasing shorts. Their net-long position is at its lowest level since February. This is all adding up to an increased likelihood of further losses for oil prices. Societe General says this downturn could bottom out in the high $30s per barrel.
Other investment banks agree. "Demand growth remains lackluster and has not made significant inroads to clear the inventory overhang for oil," Barclays said in a recent research note. "With the macroeconomic picture worsening and Saudi Arabia unlikely to exhibit much restraint as Iran seeks incremental market share, refineries are going to find themselves in the line of fire.”
By Nick Cunningham of Oilprice.com
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