Libya’s oil production has been significantly disrupted in recent days, with roughly 800,000 barrels per day (b/d) going offline. Up until only recently, the North African country’s output had proved resilient, despite the nine-month civil war. But the outage represents a dangerous new phase for Libya, even as global markets have largely shrugged off the disruption.
Libyan Civil War hits oil
In April 2019, warlord Khalifa Haftar and the Libyan National Army (LNA) launched an attack on Tripoli, betting on a swift campaign. But the war quickly devolved into a stalemate. Fighting has dragged on for months, pulling in outside regional powers. Still, both sides had an interest in keeping the oil flowing as both sides received a portion of the revenues.
Haftar had production cut off at many of Libya’s oil fields in mid-January, while also disrupting flows through the main export terminals.
The calculus for the LNA has apparently changed. Haftar had production cut off at many of Libya’s oil fields in mid-January, while also disrupting flows through the main export terminals. The disruption also extended to a major pipeline. As a result, the 300,000-b/d Sharara field, among others, has been shuttered. Reports suggest 800,000 b/d could be temporarily knocked offline.
Libya’s National Oil Corp. declared force majeure on shipments from several oil fields on January 17. The company said that it will not be able to produce more than 72,000 b/d once its storage tanks are full. Libya produced roughly 1.2 million barrels per day (Mb/d) as recently as last week.
The decision to essentially blockade the country is a dangerous escalation by the LNA. Haftar is betting that disrupting oil flows will cut off Tripoli from oil revenues and tip momentum in his favor. “The LNA’s decision to halt oil output represents a significant break in its previous policy; it appears to believe that it can obtain enough funds from elsewhere to maintain its operations, while attempting to starve the GNA of cash,” Standard Chartered wrote in a report.
The decision to essentially blockade the country is a dangerous escalation by the LNA.
Meanwhile, the battle for Libya has morphed into a proxy war between multiple outside powers. Russia, the UAE and Egypt are supporting Haftar and the LNA, and Turkey is supporting the Government of National Accord (GNA) in Tripoli.
Just days after Haftar walked out of negotiations held in Moscow, he traveled to Berlin for a security summit on January 19. Libya’s prime minister, Fayez al-Sarraj, was also in attendance, but the two leaders were kept away from each other. European officials are trying to tamp down the crisis, particularly after Turkey threatened to step up its commitments by maybe even sending troops to Libya in defense of the GNA. But the gathering produced very little.
Oil market in surplus…before Libya outage
Global oil prices briefly shot up on Monday, which also brought news of a minor supply disruption in Iraq. But the jolt to prices brief.
Nearly a decade ago, the Arab Spring swept across Libya, and the loss of the country’s oil production sent prices into triple-digit territory. The latest outage comes as the oil market is stuck with a persistent glut. It was only a few weeks ago that OPEC+ announced deeper production cuts in order to head off a price slide.
For now, the market does not appear to be too concerned with the events in Libya, and several analysts predicted that the disruption was likely only going to be temporary. “The oil market remains well supplied with ample stocks and a healthy spare capacity cushion. In other words, the bullish price impact may prove to be fleeting,” Stephen Brennock of oil broker PVM, told Reuters.
Others agreed. “We expect the current scale of outages to be fairly short-lived… as there is limited upside for Haftar to slow the country’s oil revenues to a trickle,” Amrita Sen, chief oil analyst at Energy Aspects, said.
“We do not expect the suspension of shipments from Libya to last, and expect production and exports to stabilise soon. This appears to be supported by the moderate price response so far,” Commerzbank said.
The ample supply narrative could be upended by an extended outage in Libya.
But the ample supply narrative could be upended by an extended outage in Libya. “Even if they adhere strictly to the cuts, there is still likely to be a strong build in inventories during the first half of 2020,” the IEA said in its January Oil Market Report, referring to the OPEC+ deal. “OPEC crude production would fall to 29.3 mb/d in January if there were to be full compliance and steady output from Libya, Iran and Venezuela. That is still 700 kb/d above the 1Q20 call on OPEC crude and 900 kb/d above the 2Q20 call.”
However, that assumed surplus is smaller than the amount of oil that could be lost in Libya. If the outages continue and Libya’s production falls as low as 72,000 b/d, as Libya’s NOC warned, that would amount to more than 1 Mb/d. If that occurred, “then the oil market would no longer be oversupplied,” Commerzbank said in a note.
Twitter
