Commodities

Crude oil prices retreat on increased supply from Libya

K Gurumurthy BL Research Bureau | Updated on July 09, 2014

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crude oil

There is some relief for consumers of crude as Brent crude prices have retracted about 6 per cent from the high of $115.71 per barrel recorded on June 19.

Earlier, the fear of supply disruption following the unrest in Iraq had taken the Brent crude oil prices sharply higher by about 7 per cent in just two weeks in June.

Buy the rumour. Sell the fact.

Anyone following the adage “buy the rumour, sell the fact” would have made money in this episode.

Violence in Iraq

Iraq is the second largest producer among the OPEC nations. It produces about 3.3 million barrels per day (bpd). The violence in the country is however largely happening in the northern part. Fear in the market that the production would get disrupted because of the violence, made market participants buy in anticipation thereby spiking the crude oil prices in a short span of time.

But the fact remains that majority of the crude supply — almost 75 per cent that is 2.5 million bpd — comes from the southern part of Iraq. The southern part of the country is insulated from violence at the moment.

Iraq’s two largest oil fields, Rumaila and West Qurna-2, are located in the southern part of the country. These two oilfields together hold a reserve of about 30 billion barrels. This makes the oil supply completely sheltered in Iraq. After having realised that there is now immediate threat for oil supplies, market had sold off thereby pulling the price lower in the last two weeks.

However, the threat of supplies getting disrupted is still open. If the violence starts spreading towards the southern Iraq, then there is a real danger for the crude prices to spike again.

Increasing supply from Libya

Another factor that has eased the pressure on the supply side is Libya. The operations in Libya’s EI Sharara oilfield, which had stopped on account of a strike in the last four months, had resumed now. This field produces 340,000 bpd.

Also, two major ports in the country, which were closed for almost a year because of protests, would be opened shortly. These ports account for 500,000 bpd of oil exports. Increasing supplies from Libya is also making the crude prices decline.

Technical Outlook

The reversal in Brent crude oil from the high of $115.71 has happened from just below an important long-term trend-line resistance at $116.

However, Brent crude is now poised near a crucial long-term support level of $108.35, which is the 200-week moving average level as well a long-term trend-line support level. A strong break below this level can drag the prices lower to $105. On the other hand, a higher reversal from $108.35 will keep the chances alive for the crude prices to revisit $115 levels.

Published on July 09, 2014

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