Will Libya Crush OPEC’s Plans For A Tighter Oil Market?

Libya has a unified government for the first time in more than a decade of civil war. It is also pumping 1.3 million barrels of oil daily and plans to increase this to 2.1 million bpd within four years. Libya has been the odd man out in OPEC production cut agreements, exempt from any because of its political turmoil. Now, it is in a position to undermine the cartel’s price control efforts.

The new interim government of the country that holds the largest oil reserves in Africa was sworn in on Monday. With this came hopes that Libya could finally begin the task of returning to normal after years of conflict that has crippled its economy and left it exclusively dependent on oil revenues. With this degree of dependence, a return to normal would unavoidably involve a boost in oil production.

The president of the National Oil Corporation recently told Bloomberg in an interview that plans were to boost the current production rate to 1.45 million bpd by the end of the year, increasing this further to 1.6 million bpd in 2022 and 2.1 million bpd in four years.

Now, an additional 150,000 bpd by the end of the year is unlikely to harm oil prices or interfere much with OPEC+ plans to keep them higher. Yet this would only hold true if demand projections for the second half of the year turn out to be accurate, and if Saudi Arabia continues to cut that additional 1 million bpd that last month led to OPEC’s total coming out 650,000 bpd lower than the January total.

But there is a problem in calculating OPEC’s total. The February total, at 24.85 million bpd, was indeed 650,000 bpd lower than the total for January. But that did not mean that everyone cut more. On the contrary, all the OPEC members that were exempt from production cuts, including Libya, Iran, and even agonizing Venezuela, increased their production. Even Nigeria pumped more in February despite its OPEC+ obligations.

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OPEC is in a fragile balance between price hawks and doves who’d rather have the market share than the higher price. The internal divisions in the cartel are no secret. Until now, the trio of exempt producers was not a big factor in any production decisions: all three countries were troubled enough to not be a problem when it came to production surprises. After all, this is how they gained their exemption. But now, Libya is in a position to add 300,000 bpd to OPEC’s total within a year—or more if it can swing it. It needs those oil revenues desperately. And Saudi Arabia can’t keep cutting 1 million bpd from its production forever.

Saudi Arabia’s Foreign Minister, Faisal bin Farhan, recently told media what OPEC wanted was a “fair” price for its crude oil. This fair price is certainly higher than the world’s biggest consumers of OPEC oil would like it to be. India, the world’s third-largest consumer of oil, has repeatedly called on the cartel to stop cutting production and let prices slide. Meanwhile, it has started looking for alternatives to Middle Eastern oil. China has filled up its tanks with crude and does not need to keep buying at record rates. And Europe and the U.S. have other problems right now—namely the continuing pandemic—that exceed their worry about oil. Related: Permian Production Set To Rise Despite Shale Decline

Prices are as fragile as OPEC’s consensus on production because of the pandemic and the uncertainty that demand will improve as fast as OPEC hopes. The cartel has done what it could in controlling supply, but there is only so much you can do on the one side of the fundamentals equation. India (again) has already warned that its economic recovery will suffer setbacks because of the rebound in oil prices. The U.S. is bracing up for a surge in gasoline prices this summer, and those stimulus checks will not last forever. Despite statements from OPEC+ officials that the oil market is rebalancing, it is a precarious balance on a knife’s edge.

To be fair, few believe that Libya has what it takes to secure lasting peace so its oil production can continue to grow, affecting global oil prices. There have been too many examples to the contrary, with political conflicts invariably targeting oil fields or using infrastructure as weapons in inter-faction disputes. And then there is the question of repairs—much needed after years of forced neglect. NOC’s Sanalla has conditioned Libya’s oil production growth on the government releasing the budget that NOC needs to make those repairs and ensure the oil will flow uninterrupted to export terminals. 

Yet for all the bad rap when it comes to sustained oil output growth, Libya recently proved that where there’s a will, there’s a way. From less than 100,000 bpd in September, the country managed to boost its average daily oil output to over 1 million bpd by the end of the year. That’s an increase of more than a million barrels daily within just three months—a very respectable production recovery rate. And a very real threat to OPEC that has yet to come into full view. When it comes, Saudi Arabia may find that it needs to keep unilateral control of its production, in addition to the OPEC+ cuts to keep prices where they are.

By Irina Slav for Oilprice.com

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