Just when traders thought that oil prices are stabilizing, a new market disruption reminded them that there is no guarantee for lack of turbulence in the oil market.
Oil prices are rising today as Libyan exports from the port of Hariga are taking a hit, due to a force majeure that NOC has declared following a budget disagreement with Libya’s central bank.
Despite being an OPEC member, Libya has enjoyed an exemption from production cuts during the Covid-19 crisis, which allowed the country to increase oil production to just over 1.2 million bpd in March.
If the 120,000 bpd Al-Hariga port remains closed, we estimate that more than 100,000 bpd of Libyan oil production could be shut in. The port, located in Libya’s east, is the delivery point for crude production from the Sarir and Messla fields.
Although the export disruption is not of a very large scale for the moment, NOC has threatened to block exports from other facilities too, and that is why prices are rallying.
The Sarir and Messla fields, before the force-majeure was announced, were set to produce 215,000 bpd of oil in April.
The projects, operated by the Arabian Gulf Oil Company (AGOCO), produce light sweet crude, so the outages will provide upward support to Brent prices and other light sweet grades trading in Asian and European markets.
NOC was planning to hit 1.45 million bpd by the end of 2021, a very optimistic scenario. The higher forecast is contingent on the ceasefire and political peace holding, and in Rystad Energy’s best-case scenario, oil output could exit the year at 1.3 million bpd.
Rystad Energy believes that a further ramp-up to 1.40 million bpd, still an optimistic target, could more realistically be possible by 2022 year-end.
In the latest budget allocation communicated in March, NOC has allotted a significant portion of the annual budget for covering its expenses related development of oil and gas fields, payment of salaries and maintaining production from mature fields.
Failure to pay salaries on time has led to serious blockades at the oil and gas infrastructure in the past and is a constant thorn for the stability of the Libya’s oil exports.
NOC has reportedly allocated $1.6 billion for 2021, which we believe could in theory fuel the increase in production to 1.45 million bpd that they are estimating by the year-end-2021.
However, we should also remember that back in 2019 NOC also allocated a hefty sum to manage its operations but only received 55%-60% of the total promised budget.
A less exotic market mover is the US crude inventories, with a weekly decline expected by the market.
With weather getting better in the US and vaccination campaigns accelerating, oil demand is benefiting and the market hopes this will translate in storage draws.
US oil demand is expected to rise to 11.6 million bpd in April and grow to about 12.1 million bpd already in June. This 500,000 bpd is a significant uptick in demand and storage levels are bound to see some further relief.
Despite the positive market developments, there is some downside that could spoil the price party.
Asia’s Covid-19 infections are also rising in several countries, including key markets such as India and the Philippines.
It remains to be seen if Hong Kong will be the only country to issue flight suspensions or if more nations will follow suit to counter the pandemic’s spread.
Last but not least, Libya’s blockade can easily be resolved, with exports quickly resuming, if negotiations over the budget bear fruit soon. Which means that any price gains related to Libya today, can be shaved off at once when the dispute is out of the way.
