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Did the fall in Libyan oil exports affect crude supply?
Since the prolonged strikes at key loading ports in Libya at the end of July, 2013, more than one million barrels per day of crude oil production have been lost in Libya. These supply disruptions have affected the Brent crude oil price, a global benchmark, because the outages reinforced a tighter market by increasing global supply disruptions and decreasing surplus crude oil production capacity. Global markets adjusted after the initial shock in August, as supplies of crude oil from other countries made up the difference. However, there are several other factors that have recently influenced the Brent price, some of which are discussed below.
Why does Libyan oil production closely follow political turmoil?
From March, 2011, to December, 2011, supply disruptions in Libya reached the highest average level when production reached a low of 0.27 million barrels per day on an average during the period. Disruptions to Libya’s production come amid increased outages elsewhere, particularly among fellow members of the Organization of the Petroleum Exporting Countries (or OPEC). As a result, production increased to an average of 1.37 million barrels per day from January, 2012, to May, 2013, with the hope of a resolution to the political conflict. It decreased again to an average of 0.41 million barrels per day from July, 2013, to May, 2014, due to the tension between the Libyan government and the rebels, led by Mr. al-Jathran, as well as the strikes at the ports.
Libya’s share in OPEC falling
From January, 2010, to January, 2011, the share of Libyan oil production in total OPEC production was ~5.5%. From February, 2011, to November, 2011, it fell below 1% before recovering to ~4.6% from March, 2012, to March, 2013. It fell again after the brief recovery period. In 2014, it averages around 1% of OPEC production.
Typically, most of Libya’s crude oil is sold to European refiners. In 2012, more than 70% of Libya’s crude exports were sent to Europe. The recent disruptions in Libya started around the same time as the reduced crude runs and maintenance among European refiners. The timing eased the scramble to substitute for the lost barrels of Libyan light, sweet crude oil.
An improvement in the political situation in Libya would lead to higher production and export of crude oil from Libya to the rest of the world. Higher supply of oil can help reduce oil price, which would negatively affect oil producers like ExxonMobil Corporation (XOM), ConocoPhillips (COP), and EOG Resources Inc. (or EOG). It’s important to note that most of these companies are components of energy exchange-traded funds (or ETFs) such as the Vanguard Energy ETF (VDE). However, this would be positive for oil producers who have active participation in oil production in Libya like Occidental Resources (or OXY), Statoil ASA (or STO), ConocoPhillips (COP), and Marathon Oil Corporation (MRO). Some of these are components of the Energy Select Sector SPDR (XLE).
© 2013 Market Realist, Inc.