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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 Spike On Libyan Violence

The Libyan National Army (LNA) has launched a campaign to take over Tripoli and oust the internationally-recognized government, the latest phase in a long-running civil war that has simmered since the fall of Gaddafi eight years ago.

The LNA, led by Khalifa Haftar, is marching on Tripoli after solidifying control of vast swathes of territory in Libya’s east. Haftar ordered the offensive last week, and there are reports of fighting near Tripoli over the weekend, with the LNA having conducted at least one airstrike as of Sunday. It’s unclear how the situation will play out. The LNA is widely thought to be more organized than its counterpart in Tripoli, but Haftar is disliked in and around the capital. Libya’s internationally-recognized government vowed to fight back and “cleanse all Libyan cities of the aggressors,” a spokesman said.

“At the moment it’s too early to come to any firm conclusion, and ultimately fighting could drag for weeks,” said Mohammad Darwazah, a director at Medley Global Advisors, according to Bloomberg.

The rival factions had made progress on political talks in recent months, pushed along by the UN. The fighting now underway erases all of that goodwill and it seems that UN officials were caught off guard with how quickly the situation deteriorated. Related: What’s Next For Algeria As Bouteflika Steps Down

A contingent of U.S troops supporting U.S. Africa Command temporarily exited the country due to “declining security” in Libya. “The security realities on the ground in Libya are growing increasingly complex and unpredictable,” said U.S. Marine Corps Gen. Thomas Waldhauser, commander, U.S. Africa Command, in a statement.

The turmoil could threaten Libya’s oil supplies. On and off civil war, as well as more minor skirmishes involving pipelines and oil fields, has repeatedly disrupted Libya’s oil production and exports. For now, Libya’s main oil fields, pipelines and export terminals do not lie in the path of the fighting, although there is one major port nearby. “Oil operations have been largely normal but any sustained fighting could quickly bring Libya back below one million barrels a day,” Darwazah said.

The irony is that Libya’s oil sector has rebounded strongly over the past year, and the head of the National Oil Corp. has laid out ambitious goals of continuing to ratchet up output this year and in 2020.  Last year, the LNA tried to block oil exports and take control of shipments. Also, just a few months ago Libya’s Sharara oil field – the country’s largest – went offline amid unrest.

“There is no reason to expect any immediate impacts from the fighting on Libya’s oil and gas infrastructure, which is focused in the east and south-west of the country” Hamish Kinnear, Senior MENA Analyst at global risk consultancy Verisk Maplecroft, wrote in an analysis. “Intense inter-militia fighting in the capital in September 2018, for example, had no effect on Libyan oil production.” Related: Oil Markets On Edge As Military Clash Looms In Libya

Still, this time could be different. “A drawn-out conflict, however, will force the LNA to commit increasing amounts of military and financial resources to its war effort. This means the group will have to dial down its already limited presence in oil producing areas of the Oil Crescent and the south west, raising the risk of disruption to production,” Hamish Kinnear of Verisk Maplecroft said.

Kinnear noted that while the LNA has control over much of Libya’s oil production already, it does so through “a complex web of alliances with local militia groups, all of which depend on payments from the LNA.” Protracted fighting could sap the LNA of resources, both military and financial, while also distracting it elsewhere. That puts the country’s oil fields at greater risk.

The potential outage of Libya’s oil production comes as the broader oil market continues to tighten. OPEC+ cuts have helped erased the supply glut, while outages in Venezuela and Iran have tightened the market more than most analysts had expected. Meanwhile, we are a few weeks away from the expiration of waivers for Iran sanctions. “Libya is at risk again,” a U.S. official involved in Iran sanctions told the Wall Street Journal. “We can’t afford an accident in the oil market.”

The U.S. government was already considering bowing to oil market pressure by granting extensions on waivers for Iran sanctions.

By Monday, Brent shot up above $70 per barrel. “In the event of renewed production outages in Libya, the oil market risks sliding into an even larger supply deficit in the second quarter,” Commerzbank wrote in a note.

By Nick Cunningham of Oilprice.com

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