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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The Ticking Time Bomb That Could Crush Oil Markets

Libya’s oil production is down to less than 200,000 bpd, and the uncertainty surrounding the outage create complications for OPEC+ as it looks to cut deeper.

Libya’s civil war entered a dangerous new phase a few weeks ago when the Libyan National Army (LNA) and associated militias blockaded oil export terminals as a way of applying pressure on the Government of National Accord (GNA) in Tripoli. The standoff continues, and Libya’s output has plunged to around 180,000 bpd, according to estimates from late last week.

On Sunday, Libya’s Azzawiya Oil Refining Company said that it was ceasing refining operations for the time being because it does not have enough crude oil.

The National Oil Company warned in January that production would ultimately fall to zero because storage would fill up and oil fields would need to be idled.

The outage is significant, totaling between 800,000 bpd and 1 million barrels per day (mb/d). Brent crude has collapsed below $55 per barrel because of the coronavirus, and the oil market appears largely indifferent to the disruption in Libya. The fear is over destroyed demand in China, and broader economic damage from the mass quarantine. Against that backdrop, it’s hard to imagine where Brent would be trading had the outage in Libya never occurred.

“What is more, Libyan oil production could recover again soon if agreement is reached next week in Geneva following the meeting now of the conflicting parties in Cairo,” Commerzbank wrote in a note on Monday. “Over 1 million barrels of additional oil per day from Libya could possibly push the Brent price towards the $50 per barrel mark in the short term.”

Now, OPEC+ is negotiating another round of cuts in order to keep the market from collapsing further. OPEC’s Joint Technical Committee (JTC) proposed 600,000 bpd in deeper reductions, and extending the cuts through the end of 2020. Related: Oil Sinks To Prices Not Seen Since 2018

If OPEC+ proceeds as expected, the additional 600,000-bpd cut will take the total cuts from 2.1 to 2.4 mb/d. Add in another 300,000 bpd of unilateral reductions from Saudi Arabia and the total becomes 2.7 mb/d.

But how does Libya figure into this?

Libya could stay offline or come back online at any moment. “In our view, the oil market might get confused about the role of Libya in relation to the proposed OPEC+ deal,” Standard Chartered wrote in a report on Tuesday. “We understand that the forecast market balances used to calibrate the proposed cut assume that Libya’s output returns immediately at its previous 1.1mb/d.”

The OPEC+ accounting assumes Libya bounces back, and the reason for that is “to remove Libyan exports as a potential bearish factor,” Standard Chartered added. “[I]f they were to return quickly it would require no fine-tuning of the agreement and any slower return would represent an additional market tightening.”

The investment bank said that it’s possible that “the market might not fully appreciate this Libyan aspect in the short run; it could incorrectly see the 0.6mb/d cut as purely determined by the coronavirus and think that extra Libyan exports would require further cuts from OPEC+ to balance the market.”

So, OPEC+ is assuming Libya bounces back so that there is no bearish surprise. But the civil war could just as easily drag on indefinitely. If that occurs, that would tighten up the market relative to what OPEC+ is assuming. Recent negotiations in Geneva did not lead to a ceasefire and the war continues. Another round of talks is scheduled for later this month. 

“This means the blockade is likely to remain in place at least a few more weeks,” JBC Energy wrote in a note. However, the firm said that uncertainty will persist, and there is a formidable challenge for OPEC+ in terms of timing. “Libya’s return could easily come sooner than the [OPEC+] cuts, whilst it would in any case most likely outpace them in terms of size,” JBC added.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on February 12 2020 said:
    Since the start of the civil war in Libya in 2011, the global oil market has already factored in the collapse of Libya’s oil production. That is why oil prices have been totally ignoring what has been happening in Libya since then. In a nut shell, Libya has become a footnote on the global oil market.

    Any new cuts by OPEC or deepening production cuts by further 600,000 barrels a day (b/d) will be a total waste and futile with no effect whatsoever on oil prices and will only lead to a loss of market share.

    Even if OPEC’s production plunges by 2.0 mbd on top of Libya’s virtual loss of its production amounting to 1.0 mbd, this will not stop the continued decline in global oil demand and prices as long as the coronavirus outbreak is still raging. This is not due to lack of global demand but to physical inability of China to import and receive crude oil while it is in quarantine.

    Once the outbreak is contained, the global oil market will rectify itself quickly with China’s crude oil imports and prices recouping their recent losses.

    Russia is yet to be persuaded by the need for new cuts. Russia’s economy could live with oil prices at $40 or even less. There is another major reason why Russia is hesitant about new production cuts. Russian oil companies have long balked at continued production cuts, arguing that the cuts hinder their production expansion plans, while leading to a wasteful loss of market share.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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