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15 November 2014

If Oil Disappears in the Desert, Does the Market Notice?

NOVEMBER 12, 2014 

Libya's crude production is again imperiled, but an oversupplied market doesn't seem to mind. 

The stunningly improbable return of oil production in Libya, right in the middle of a civil war, is one of the reasons crude prices have been tumbling. But now this Libyan crude renaissance looks to be ebbing -- with potentially nasty consequences for Libya and a fresh dose of uncertainty for an already rattled oil market.

The latest development is an armed struggle for control of Libya's biggest oil field, El Sharara, in the country's south. Reuters reported that an armed group linked to the rebel government in Tripoli stormed the field last week, marking the first time that the breakaway government sought control of the country's oil resources.

On Monday, Nov. 10, that militia appeared to have control of the field; even so, Libya's National Oil Corp.hopes to restart production as soon as Wednesday. In the meantime, that struggle disrupted the power supply to another nearby oil field, taking it offline too. Together, those losses have temporarily cut Libya's precarious oil output by about 300,000 barrels a day. Back in the summer -- during an apparent high-water mark -- Libya was pumping as many as 900,000 barrels daily. Fresh protests in an eastern Libyan port are disrupting oil exports there, further complicating matters.

Libya's oil miracle looks like the latest victim of the factional violence that has rent the country to pieces since the 2011 uprising and fall of former dictator Muammar al-Qaddafi. Libya's civil war has spawnedrival governments, each with its own loyal militias. On Wednesday, car bombs ripped through cities in eastern Libya, including Tobruk. To make matters worse, last week the Libyan Supreme Court in Tripoli declared the exiled, internationally recognized parliament in Tobruk illegal, sowing further political uncertainty that could worsen conditions for Libya's oil industry.

"I think the real anomaly was Libya producing 800,000 to 900,000 barrels a day," said Geoff Porter, director of North Africa Risk Consulting. "The insecurity before didn't jibe with the increased and sustained production. Now, the wild swings of oil production seem to be more in line with the political chaos and the indeterminate security situation," he added.

But it's unclear just how much the factional fighting will hurt Libya's oil industry, as there are no reliable estimates on current production. Before the 2011 uprising, Libya produced about 1.6 million barrels a day. This year, amid standoffs between rival factions, Libya's output dropped to as little as 100,000 barrels.

A sudden and stunning recovery followed. OPEC figures that Libya, a core member of the oil-exporting cartel, produced more than 750,000 barrels daily in September and may have pumped almost 850,000 barrels a day in October. Some estimates put Libyan output even higher.

That doesn't seem to be the case today. National Oil Corp. insiders just told Platts, the energy-market experts, that production has plummeted to 540,000 barrels. But even that figure doesn't really add up: Libya doesn't seem to be exporting anywhere near what it claims to be producing. Also, its domestic refining industry is too small to be eating the difference.

Confusion over how much the country is producing is mirrored by confusion over who's overseeing production. The rebels who took over Tripoli have their own oil minister. And though the parliament in Tobruk abolished the Oil Ministry, it put the head of the National Oil Corp. in charge of Libya's oil. OPEC, for its part, thinks a third man is in charge. Needless to say, it's unclear just who will represent Libya at the big OPEC meeting in Vienna this month. And it does matter: Libya holds the rotating presidency of the OPEC conference.

The armed infighting has shaken the country's top moneymaking industry before. This year, a militia leadertook over an oil-exporting port, essentially cutting offLibya's path to billions of dollars in revenues. Some Libya experts see the dueling groups as less ideological warriors than criminal gangs -- and the country's oil wealth represents a potentially big prize.

North Africa Risk Consulting's Porter says the attack on El Sharara marks the first time that the Tripoli-allied rebels "have taken control of an oil installation for political purposes."

What's not clear is what comes next. "They could use oil infrastructure for political leverage or instead keep the hydrocarbon sector out of politics," Porter said.

Libya is already paring back its budget, and a sustained drop in oil production could force even more austerity. In late October, the rump parliament slashed the budget by 20 percent because of the shortfall in oil revenues during the first half of the year. Libyan lawmakers estimate the budget deficit this year could hit $15 billion.

Although parliament is trying to spare public-sector salaries the ax, needed infrastructure projects could get squeezed, possibly fueling more unrest. If Libya's "central" government can't find alternative revenue sources to pay all the militias it supports -- including those that would like to seize national power -- or the security forces guarding oil installations, the country's oil production could decline further.

Security guards, for example, went on strike over unpaid wages at one of the country's main ports for oil exports over the weekend. That locks up one-tenth of Libya's export capacity.

But Libya's petro-dysfunction probably doesn't remove enough barrels from the glutted global market to send oil prices rising again. And this means that, despite Libya's surprise production decline, OPEC will still have to make difficult choices about whether to cut oil output when it meets Nov. 27.

Despite the chaos in numerous oil-producing countries, Libya included, oil traders have shrugged off the uncertainty. On Monday, when fresh reports surfaced of trouble at Libya's biggest oil field, crude prices ended up falling on the day. Tuesday and Wednesday, benchmark crude traded in London continued to fall. In other words, oil prices tumbled when Libyan production was roaring and continued falling when Libyan output sputtered.

"The market has priced in fluctuating Libyan production. It doesn't shock anyone anymore that Libyan supply goes up and down," said Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies in London.

Furthermore, the light, sweet grade of crude oil that Libya produces is already sloshing around the global market in abundance.

"That's why even a greater fall in Libyan production may not produce the kind of market-fundamentals crash that it would have helped create in different times," she said.

Financial markets abhor uncertainty, basic economics holds, but the turmoil across the Middle East has not rattled traders. Nor has it seemed to cut supply lower than demand, making investment banks increasingly bearish about oil prices. JPMorgan Chase just slashed its outlook for Brent crude prices next year.

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