When the NATO intervened in Libya earlier the year, oil interests were dictating, some felt. France and Italy so dependent on light crude from Libya had motivations other than simply saving the innocent lives from the brutality of the Libyan government forces, in leading this assault on Qaddafi forces, many believed. The Libyan oil carrot was too tempting, some said.
With its apparent mission accomplished, and it is still too early to come out with the final word, yet, many have heaved a sigh of relief, stressing it could lead to an earlier-than-expected full restoration of Libya’s oil exports. Qaddafi’s death “actually means little for today’s oil price, but it does remove one of a series of risk factors to a sustained ramp-up in Libyan production,” JPMorgan analyst Lawrence Eagles said.
With one eye on the chaos that plagued postwar Iraq, many in the market had feared the collapse of Qaddafi’s iron rule could result in a long-running conflict. “The economic damage from multiple chronic security issues in major producers has dogged the oil market in the past,” Eagles explained. That seemed gone now.
“Production in Iraq in the aftermath of the second Gulf war, in Nigeria and in Colombia, among others, has all been disrupted by rebel activity, so the removal of a protagonist provides a significant boost to (supply) security.”
Libya produced about 1.6 million barrels per day of mostly high-value light sweet crude before the rebellion broke out early this year. Around 85 percent of Libyan output was exported to Europe, and its disappearance contributed to the surge in Brent crude from the North Sea, in comparison to New York-traded WTI.
Top Libyan officials have been saying in recent weeks that they expected to restore crude production to pre-uprising levels within 15 months. OPEC too sees Libya restoring production to one million barrels per day within six months and attaining pre-conflict levels by the end of 2012.
However, the IEA is not that optimistic. Chief economist Fatih Biol says he would be surprised if Libya managed to restore its oil production to levels seen before the uprising against Qaddafi before 2013. “We are still looking at Libya,” he said, earlier the week. “I would be positively surprised if we see pre-war levels reached before 2013.”
However, the IEA too conceded in its latest monthly oil market report released on Oct. 12 that it now expected Libyan production to recover to around 600,000 b/d by the end of this year, having upwardly revised its previous projection of between 350,000 b/d and 400,000 b/d by end-2011.
“So far, production is made up of relatively easy barrels from fields unaffected by the fighting but thereafter restoring production may be more difficult as companies implement repairs to war-damaged fields, terminals and other key infrastructure,” the IEA said at the time.
To many, the death of Qaddafi eases the specter of a fully-fledged insurgency that could disrupt oil production for years to come.
While the Libyan theater seems to be getting back to normal, easing some of the pressure on the oil markets, the possible flare-up between Riyadh and Tehran on the purported plot to assassinate the Saudi envoy in Washington by elements from Tehran has been enough to move the markets in a diametrically opposite direction. While the unveiling of the plot led some US politicians to call for military action against Iran, Saudi Arabia too had to react assertively, insisting Iran will have to pay a very steep price for these actions.
Market watchers were keeping a close eye on this ominous development, knowing very well, any flare up could have a rather dramatic effort on the global oil demand-supply balance and consequently the prices. Also, there were some suggestions in the Western media that oil could be used by the two regional powers to settle scores suggesting, in case Riyadh really wanted to hurt Tehran, it could open its taps engineering a price collapse. While Iran is producing all the oil it can and needs all the oil money it can earn, Saudi Arabia has sufficient spare capacity. If Riyadh opens the taps, it could bring the price of oil down. And some felt, a lower oil price would hurt Tehran more, because Iran depends so much more on its oil income for meeting current expenses.
Yet all this doesn’t seem probable and practical. After all, the Saudi energy planners are not that naive to hurt their long term interests too in the process. Riyadh too needs the cash flow to sustain its growth and development.
Reva Bhalla, the director of analysis at Stratfor, also says this all is theoretical. “They would have to sustain that level of production for a while to make a significant dent in price and deal most importantly with the repercussions from Iran in that kind of trade war,” Bhalla says. “And I haven’t seen any indication they’re going to be going down this route.”
“It’s a very blunt weapon, very uncertain in terms of its impact, how low the prices go, who else is affected,” says Daniel Yergin, chairman of IHS Cambridge Energy Research Associates. “So this is not something that can be a fine-tuned policy.”
And in the midst of all these developments, the dark clouds on the global economic horizon continue to batter the oil markets too — softening them further.
So oil markets continue to be faced with winds from all directions. And in the short-term prices markets could remain considerably volatile, one could hence deduce with some degree of confidence.
