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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Oil Prices Crash As Libya Resumes Production

oil rig

Oil prices fell sharply on Wednesday on news that Libya was suddenly set to restore hundreds of thousands of barrels per day, and the U.S. struck a softer line on Iran sanctions.

Brent sank more than 6 percent during midday trading on Wednesday, as Libya’s National Oil Corp. (NOC) said that it would lift the force majeure on several major export terminals and resume shipments of oil.

The standoff with General Khalid Haftar appeared to be on its way to some sort of resolution, with the militia handing the ports back over to the internationally-recognized NOC in Tripoli. As is always the case with Libya, the situation is fluid, and any return of production does not come with a guarantee that it will be sustained.

But for now, some 700,000 bpd could swiftly come back online. The outage in Libya had helped drive up oil prices over the past few weeks, fueling speculation that Saudi Arabia would need to burn through much of its spare capacity in order to keep the market well-supplied. The timing was also crucial: Libya’s outage was unexpected, and it came just as Canada temporarily lost 350,000 bpd and the expected interruptions from Iran were revised higher due to a hardline from the U.S. on sanctions.

“The lifting of force majeure at all the Libyan ports will certainly come as relief from a supply perspective, but it remains to be seen how quickly exports can return to normal,” Harry Tchilinguirian, head of oil strategy at BNP Paribas, told Reuters Global Oil Forum.

Another factor pushing down oil prices midweek were the comments from U.S. Secretary of State Mike Pompeo, who seemed to soften America’s position as it relates to how severely it would treat countries buying Iranian oil. Late last month, a State Department officials said countries would be expected to take their imports from Iran down to “zero,” and that there would be very few waivers granted, if any. Those comments alone led to a spike in oil prices as the oil market had to reassess how much Iranian supply would be knocked offline.

In the intervening weeks, a sense of bullishness has taken over the oil market, with fears that even maximum production from Saudi Arabia wouldn’t be enough to compensate for some 2.5 mb/d of disrupted Iranian supply.

On Tuesday, Sec. Pompeo seemed to strike a different tone. “There will be a handful of countries that come to the United States and ask for relief,” Pompeo said on Tuesday in a television interview with Sky News Arabia. “We’ll consider it.” Related: The Downside Risk For Oil

A separate State Department official told reporters that the U.S. was working with Saudi Arabia to avoid price volatility. “In our meeting with the Saudi energy minister, we discussed maintaining a well-supplied oil market to guard against volatility,” the unnamed official told reporters, according to Reuters. “We coordinated – we discussed U.S. oil sanctions to deny Iran revenue to finance terrorism. We talked about minimizing market disruptions and helping partners find alternatives to Iranian supply of oil.”

While there is no official change in policy, the language was notably softer than what U.S. officials used just a few weeks ago. That opens up the possibility that the U.S. won’t take a “zero tolerance” policy towards countries importing oil from Iran, or that there could be some sort of phased implementation.

In addition, in a report published on Wednesday, OPEC downplayed concerns about whether or not it could handle the tightening oil market. In its first forecast for 2019, the cartel predicted that non-OPEC supply growth would be substantial, and that demand growth would cool to 1.45 million barrels per day (mb/d), down from the 1.65 mb/d growth rate from this year.

Even if demand remains strong, OPEC production will be more than enough to satisfy the market. “If the world economy performs better than expected, leading to higher growth in crude demand, OPEC will continue to have sufficient supply to support oil-market stability,” OPEC said in its report. Related: OPEC Won’t Take Additional Action As Oil Prices Rise

Meanwhile, one other factor led to the selloff in crude prices on Wednesday. The Trump administration is teeing up another $200 billion in tariffs on Chinese goods, a substantial escalation of the trade war between the two countries. The tariffs are only proposed, for now, and wouldn’t take effect for two months.

But the markets did not take the news well, and the prospects of a more severe trade war weighed on oil prices. “If the U.S. implements this additional tax on $200 billion of imported Chinese goods, it will be difficult for China not to impose greater taxes on commodities imported from the U.S.,” Olivier Jakob, head of energy consultancy Petromatrix, told the Wall Street Journal.

The fall of oil prices on Wednesday was all the more notable because the EIA reported a massive drawdown in crude inventories. The agency said that stocks fell by whopping 12.6 million barrels in the week ending on July 6. The decline takes total inventories down to 4 percent below the five-year average.

Figures like that from the EIA would typically lead to a spike in prices. But oil traders chose to focus on the imminent ramp up of some 700,000 bpd in Libya, combined with the possibility of more tempered losses from Iran as the U.S. has signaled a softening of its approach.

By Nick Cunningham of Oilprice.com

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  • John Brown on July 11 2018 said:
    There never was a shortage of oil & now it’s sloshing around the world again. It’s interesting how easy it is for the price of oil to be manipulated upward. However, + $70 a barrel WTI May start to choke off growth & demand especially in poorer countries but it certainly helps the US shale oil & Gas rush. It’s also great for the growth of renewables which can grab market share they likely will give back. I’m not a global warmest nut but cleaner renewable cheap energy should be a goal of the entire world. Nobody likes pollution & the world needs cleaner cheap energy & a lot of it.
  • Sunaina on July 11 2018 said:
    US sanctions on Iran oil has been followed only by a few countries while there are few major power countries and others who oppose US decision. So as long as there is no evidence that the buyers of Iran oil have stopped buying, it cannot be proved that US sanctions had a hit on the oil prices. Just a speculation and propaganda is now the current driver of oil prices and no facts.
  • Semos Gardner on July 11 2018 said:
    Nice article Nick, although, I wrote about this a couple days ago, heard from a friend over there ... Im glad to see someone's actually working the truth..
  • rob forbes on July 12 2018 said:
    Yes, it crashed a little bit, resisted the drop, and now it's back on its way up again. Pointless trying to talk it down or even up. It will find its own price. The reality is all the underlying fundamentals are certainly there for a large increase in prices. The lack of investment these last few years may only add to the problem. Lets not forget the majority of the workforce who were made redundant. When the price does rise as it's predicted to do by the geniuses, who exactly will be working the fields..?? Do you think the massive skills shortage they are facing even now will push prices down ?
  • Mamdouh G Salameh on July 12 2018 said:
    This only confirms what I have been saying that the global oil market has not yet re-balanced completely. There is still a small glut in the market capable of taking care of outages in Venezuela, Libya, Nigeria, Angola and Canada.

    OPEC shouldn’t have been persuaded by Saudi Arabia and Russia to agree to raise its production by 1 million barrels a day (mbd) in its meeting on the 22nd of June. There was no justification for increasing production. The proof is that oil prices have been hovering for the last two months around $73-$77 a barrel otherwise the price would have gone beyond $80 by now had the market re-balanced.

    Another factor pushing down oil prices was back-peddling by the US State Department from a tough policy of zero imports from Iran to the possibility of granting waivers for some countries to continue importing crude oil from Iran. The reason is that not only the overwhelming majority of nations of the world are against US sanctions on Iran but also US allies including the European Union (EU), Japan, India and South Korea are not going to comply with them.

    After all, President Trump’s worry about oil prices has nothing to do with US sanctions on Iran as his sanctions will not succeed. It is about his worry that rising oil prices will offset the benefits from his tax cuts and thus costing his republican party the midterm elections of the US senate and the US House of Representatives in November this year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Robert Preston on July 12 2018 said:
    An article on the price of oil that doesn't mention the price of oil?
  • Aghast on July 13 2018 said:
    The justification for the increase was because they were instructed to do so by the global energy leader. The carbon footprint of a USA citizen is the lowest in 7 decades. Nowhere else in the world is the carbon footprint per capita falling. In China and EU, the carbon footprint per capita is rising.

    I suggest other countries around the world adopt the USA model of placing the natural resources into the HANDS of your CITIZENS and then tax the money when the resources are monetized. Individuals operating autonomously will tend to result in a more free society with a higher standard of living for the masses. Individuals being held or kept for lack of access to natural resources end up with less freedom, less output overall and an oppressive dictatorship!

    Opening up our finite natural resources is the most sure way to rebuild the American middle class. Sell the energy to our trading partners and reinvest the proceeds to grow the money over time through research and investment. Why not reinvest the proceeds into research to replace fossil fuels in the USA? Then we could sell the technology to the rest of the world or allow them to use our fossil fuels.

    Not long ago, our domestic wealth was being extracted at 140 dollars a barrel under Obama and nobody said anything. Stupid or brainwashed people, get a grip. Despite 44, in the past decade, US citizens have gone from relying upon foreign sources for our energy requirement, some of whom wish to "destroy us", to the largest energy producer in the world with a gallon of gasoline less costly than a gallon of milk. We have hundreds of years of energy and no country in the world can compete with us at any level when it comes to energy business.

    Cut your losses and embrace free and fair trade.

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