Rising Instability, Falling Production

BMI View : Worsening instability will continue to undermine the recovery in Libyan oil output, whilst export volumes will remain critically low. However, ample global supply and weak demand will see the impact on Brent limited over the shorter term.

The deteriorating security environment in Libya supports our 2014 forecast for Libyan oil production. We argued that the recovery in output in the second half of this year would be volatile and weak, despite the return of production from El Sharara and the release of key eastern ports ( see 'Production Rising But Risks Remain', July 10 2014). We forecast output for 2014 at 350,000 barrels per day (b/d), up from an estimated average of around 300,000b/d in the first two quarters.

Instability Threatening Output

Fragile Outlook
Libya Oil Production, Consumption And Net Exports (000b/d)

BMI View : Worsening instability will continue to undermine the recovery in Libyan oil output, whilst export volumes will remain critically low. However, ample global supply and weak demand will see the impact on Brent limited over the shorter term.

The deteriorating security environment in Libya supports our 2014 forecast for Libyan oil production. We argued that the recovery in output in the second half of this year would be volatile and weak, despite the return of production from El Sharara and the release of key eastern ports ( see 'Production Rising But Risks Remain', July 10 2014). We forecast output for 2014 at 350,000 barrels per day (b/d), up from an estimated average of around 300,000b/d in the first two quarters.

Fragile Outlook
Libya Oil Production, Consumption And Net Exports (000b/d)

Instability Threatening Output

Violence has been rising. Militant Islamists have declared control of Benghazi and there is renewed fighting in the capital Tripoli. The death toll is reported to be in the hundreds, and there has been an exodus of foreign nationals from the country.

According to the oil ministry, production has been unaffected by the violence, with output stable at 500,000b/d, after falling from a peak of 600,000b/d in mid-July. The National Oil Company (NOC) puts the figure slightly lower, at around 450,000b/d. However, we question Libya's ability to sustain production at these levels.

Part of the issue is technical. The evacuation of foreign workers leaves a deficit of skilled technicians able to manage production operations. The rise in violence is also preventing key maintenance work on pipelines and pumps, which have been severely damaged by the repeated shut-ins.

Currently, the main problem is exports. As we anticipated, Libya has struggled to find export markets for its crude oil ( see 'Slow Recovery In Exports Drags On Output', July 18 2014). Several cargoes have been tendered in recent weeks, but at the time of writing none have been taken up. There are a range of factors at play here, including the uncompetitive pricing of Libyan crude, high shipping premiums and concerns over the quality of the oil and the consistency of supply. We do not see any of these dynamics changing to support a significant ramp-up in exports over the coming weeks. With storage at near full capacity, Libya may instead be forced to cut its output.

If violence continues to escalate, we would also expect unplanned supply outages, adding further downward pressure and increased volatility in Libyan crude oil production.

But Brent Keeps Falling

At the end of June, when force majeure was lifted at the Ras Lanuf and Es Sider ports and El Sharara restarted production, global oil prices fell off sharply in expectation of a 900,000b/d return of output. However, according to our research, no additional physical supply has reached the markets.

Sentiment Moving The Market
Brent Crude Price (USD/bbl)

We have yet to see the current situation in Libya feed through to Brent. Several factors are at play here. With the situation in Iraq relatively stable, the Iraqi risk premium has been largely priced out. Demand from European and Asian refiners has been relatively weak and there is a glut in supply of light sweet crudes (of similar quality to both Brent and Libyan crude blends) in the global markets. Saudi Arabia has also been pumping at near record levels - around 9.8mn b/d in July. This is placing significant downward pressure on global oil prices, counter-balancing Libyan disruptions.

However, we see upside risk to the price of Brent over the coming months. According to data from Bloomberg, shipments of the Brent, Forties, Oseberg and Ekofisk crudes that make up the Brent benchmark are set to fall to a 14-month low in August, due to maintenance work at the fields. We are also expecting a tighter supply picture to develop towards the end of the year, due to partial recovery in global demand. Geopolitical tensions over Ukraine may also help support Brent prices, as the stand-off between the West and Russia continues to escalate.

Currently, we forecast Brent at USD109.75 per barrel (/bbl) for 2014. At the time of writing, Brent is at USD105.99/bbl.

Robust Price Outlook
Brent Crude Price Forecast (USD/bbl)

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Related sectors of this article: Oil & Gas, Upstream, Production, Oil Market, Transportation
Geography: Libya, Libya
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