A crude supply and demand game is on

Updated January 26, 2020

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The only feasible thing that could boost oil prices now — for more than a day — is a sustained demand growth on the back of global economic growth. — Reuters/File
The only feasible thing that could boost oil prices now — for more than a day — is a sustained demand growth on the back of global economic growth. — Reuters/File

FOR a change, Washington, Tehran, Riyadh and their lingering, geopolitical disputes are not in the headlines. Instead, Libya and Iraq are leading the pack. What is happening in those two countries continues to interest the crude world. For despite the shale revolution, the emergence of new energy frontiers and the new variables impacting the global crude equation, Middle East refuses to slip away from ‘crude’ headlines, one way or the other — provided, one is ready to include Libya in the Middle East — at least metaphorically.

Libya is in chaos. And the ongoing tussle is about oil. Ever since Muammar Qaddafi was overthrown, Libya has not seen peace. Instability lingers on, impacting its crude output. With the fight for Tripoli on, and instability spreading, militia leader General Khalifa Haftar is beginning to shut down the entire crude production of the country.

General Haftar forces have already shut down more than half of the Libyan crude exports. Key Libyan ports – Hariga, Brega, Sidra, and Ras Lanuf – remain closed. Local tribes, allies of General

Haftar, have in the meantime, also blocked crude oil output at the El Feel and Sharara fields in southern Libya, halting crude transportation from those fields to the Zawiya export terminal. The fields, producing 70,000 and 300,000 barrels per day (bpd), are among the country’s major producing fields.

Adding to the chaos, Haftar allies, the Libyan, Petroleum Facilities Guards (PFG) have also closed the valves at the Hamada pumping station. The PFG is a self-declared Libyan oil company and militia led by Idris Bukhamada. Established in October 2012, it took control of the main oil export terminals in eastern Libya in the summer of 2013.

Libya is an important crude producer. Many European refineries depend on its light crude, which is not very easily replaceable. Libya’s oil production, according to secondary sources provided in the Organisation of Petroleum Exporting Countries’ Monthly Oil Market Report for January, was 1.139 million bpd as of December, last year.

In the meantime, escalating protests in Iraq have also begun impacting its crude output. These have led to a halt in production at its Al Ahdab oil field, pumping some 70,000 bpd, Bloomberg reported. Chinese company operates this oilfield. Another field Badra, producing about 50,000 bpd was also faced with closure last week. Russia’s Gazprom Neft is the operator of that field.

Iraq is the second-largest oil producer and exporter in the Opec. It has been hit by a series of protests since last year, as disgruntled citizens demanding better public services and economic reforms are up in protest against the government’s inaction and corruption.

Yet, markets are ignoring the outages. This is so different from the recent past. When the civil war began in Libya, way back in 2010 and 2011, markets were in a panic. To calm the nerves, Riyadh had to hurriedly convene a meeting of oil ministers from major oil-consuming and producing countries.

On a personal note, one could recall Abdallah Salem el-Badri, the then Opec Secretary-General, a Libyan national, extremely perturbed that evening on the unfolding events in Tripoli. For, el-Badri was unable to get in touch with his near and dear ones in Libya. Returning to the point, markets today, have spoken. Despite the outages in two major Opec oil producers, there is no panic. Over the last few years, market dynamics have completely altered.

Markets are now in a position to ignore the almost 1.2m bpd outage. And, they are!

“Market participants appear to fret less about supply disruptions in the Middle East or at least the risk of disruptions, thanks to the impressive growth seen in the US output, over recent years,” ING Bank said in a recent report.

“About 95 per cent of Libya’s oil supply could be at risk, yet crude traders are barely alarmed, underscoring the market’s bigger worries over the mammoth recent builds in US fuel supplies,” analyst Barani Krishnan was quoted as saying in the press.

It is not about geopolitics, at least for now. In the longer run, oil prices are mainly driven by demand and supply fundamentals, and with ample supplies, fundamentals are weak.

Not an attack on Saudi Aramco facilities; not even the very public US assassination of the Iranian general Soleimani in Baghdad and the prospect of an all-out war between the two, appeared to move the needle. The only feasible thing that could boost oil prices now — for more than a day — is a sustained demand growth on the back of global economic growth. That simply is missing.

Published in Dawn, January 26th, 2020