Commodities

As OPEC+ reels from Coronavirus, Libya threatens knock out punch

Bloomberg London | Updated on February 08, 2020 Published on February 08, 2020

After a week of wrestling, OPEC and Russia may be within reach of a hesitant response to the coronavirus. But a possible peace deal in Libya threatens to knock them off balance.

As the deadly epidemic in China has hammered crude oil demand and prices, it is often been overlooked that the sudden surplus in global production would be much worse if most of the North African nation’s oil industry had not been shut down by conflict.

If the warring sides are able to reach an agreement in Cairo on Sunday, the restored oil output would dwarf the tentative production cut that was proposed at OPEC+ talks this week.

That would turn what is already been a stern test for the cartel into a potentially insurmountable challenge.

“If Libya is able to restart exports, it will further complicate the maths for the dwindling number of OPEC countries able to implement credible output cuts,” said Bill Farren-Price, a director at consultant RS Energy Group. “Saudi Arabia and its allies would simply be making room for additional barrels from other producers at a time when demand is suffering a major exogenous shock.”

The alliance between the Organisation of Petroleum Exporting Countries and countries including Russia has endured one of the toughest periods in its three-year history. The coronavirus has struck at the heart of global oil demand growth, locking down cities that are home to tens of millions and shutting a huge swathe of manufacturing.

Crude has slumped about 20 per cent in the past month, with US prices dipping below $50 a barrel for the first time in more than a year. If prices do not recover soon, the budgets of entire nations from Saudi Arabia to Kazakhstan will suffer.

The Saudis have been pushing for urgent action — an emergency OPEC+ meeting that would agree on a substantial production cut. But the cartel is already making significant supply reductions, withholding about 2.1 million barrels a day from the market to offset the US shale boom. Russia has been reluctant to go any deeper.

Three days of talks between OPEC+ officials in Vienna this week delivered only a sliver of what the Saudis had wanted. Technical experts from the group recommended a fresh cut of 600,000 barrels a day — barely a third of the drop in demand from Chinese refiners — but they did not set a date for an emergency meeting and Russia still has not given its approval. They also recommended an extension of the existing output cuts by nine months until the end of 2020.

Russian Energy Minister Alexander Novak has promised to say within days whether his country will support the recommended OPEC+ production cut. A Libyan peace accord could render that answer redundant before hes even delivered it by adding about 1 million barrels a day of oil to the market.

The uncertainty over both how Libya and the coronavirus unfold mean OPEC+ faces an extremely difficult task, said Amrita Sen, chief oil analyst at Energy Aspects Ltd.

Long conflict

The resumption of Libyan production is by no means certain. Many issues remained unresolved after talks in Geneva on Thursday between the internationally-backed Tripoli government and General Khalifa Haftar, the military leader whose Libyan National Army controls the oil-rich east and south of the country and has been blockading crude exports since January.

The conflict in the country has left more than 2,000 people dead and transformed into a proxy war between regional powers including Russia, Egypt and the United Arab Emirates. The country is inherently unstable, and has seen regular bouts of violence and disruption to oil supplies since the fall of dictator Moammar Al Qaddafi in 2011.

“Eastern tribal leaders are disputing the unfair distribution of oil,” United Nations Special Representative Ghassan Salame said at the talks in Switzerland. He expected them to give a list of demands before the distribution of oil revenues is discussed in Cairo on Sunday. “The UN mission wants the oil to flow as soon as possible,” he said.

The oil market has already been significantly weakened by the coronavirus, which by some estimates is the biggest demand shock since the 2008 to 2009 financial crisis. Even if OPEC+ implements the recommended 600,000 barrel-a-day cut it would not be enough, according to Ed Morse, the global head of commodities research at Citigroup Inc.

The epidemic could push Brent crude as low as $47 a barrel, from about $55 currently, Morse said. And adding a surge of Libyan crude into that mix would be the recipe for a deeper price rout.

If there was a Libya-return headline this minute, the market would likely take a hit, said Paul Horsnell, head of commodities strategy at Standard Chartered. It would certainly be bad timing.

Published on February 08, 2020
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