Besides ME tensions, Libya’s crisis could cause oil prices to overshoot

Investing.com -- In the Middle East and North Africa (MENA) region, recent geopolitical developments have increased attention to oil markets, with Libya's escalating situation receiving particular attention.

The ongoing tensions between Israel and Hezbollah in the Middle East have raised global concerns, but the deepening political crisis in Libya is a more immediate threat to global oil prices.

Analysts at Citi Research warn that the potential disruption of up to 900,000 barrels per day (b/d) of light, sweet crude oil from Libya could push Brent crude oil prices into the mid-$80s per barrel, further complicating an already precarious global energy landscape.

Libya, a key player in the global oil market, is once again on the brink of a significant crisis. The country’s political instability, driven by a power struggle between its divided elites, is threatening to disrupt its oil production and exports.

The ongoing dispute centers around the control of the Central Bank of Libya and the management of oil revenues, with factions vying for dominance over the country's most crucial economic asset.

Citi Research flags that the worsening political situation in Libya could lead to the disruption of up to 900,000 b/d of light, sweet crude oil flows.

Such a disruption would significantly impact global oil markets, especially given that Libyan crude is highly valued for its low sulfur content. The potential supply shortfall could trigger a surge in Brent crude prices, with analysts forecasting a possible overshoot into the mid-$80s per barrel range.

The geopolitical risks in Libya are intensifying due to a combination of factors that could further exacerbate the situation. A key issue is the disruption at the El Sharara oil field, one of Libya’s largest, which has been severely impacted by political tensions.

This disruption was initiated by Saddam Haftar, the son of Eastern Libya’s military leader General Khalifa Haftar, who ordered the field's closure in response to an international arrest warrant against him.

Although production at El Sharara has partially resumed to meet domestic demand, it remains significantly below capacity, operating at just 80,000 barrels per day (b/d) out of a potential 300,000 b/d. This reduction in supply is already tightening the global market for light, sweet crude, and any further disruptions could have serious repercussions.

Adding to these challenges is the upcoming refinery maintenance season, which, coupled with potential additional supply from OPEC+, could temporarily ease some pressure on crude oil prices.

However, this might not be enough to counterbalance the effects of a prolonged Libyan supply disruption.

“The sudden closure of El Sharara oil field could potentially prompt OPEC+ to proceed with their planned tapering over 4Q’24, amounting to around 200-k b/d of mostly sour barrels, which even if fully offset by El Sharara closure would still imbalance the global crude oil quality spectrum,” the analysts said.

The impact of the Libyan crisis is also expected to affect the price differentials between sweet and sour crude. The closure of Libyan oil fields, particularly El Sharara, has already begun to squeeze the supply of light, sweet crude.

Citi Research predicts that even if there isn’t a full blockade of Libya’s oil export flows, the price differentials between sweet and sour crude could widen, with the Brent-Dubai Exchange of Futures for Swaps (EFS) potentially increasing from the current $1.85 per barrel.

Further complicating the global oil market dynamics is Kazakhstan's potential adoption of a new compensation plan, which could reduce its CPC Blend exports by over 200,000 b/d in October 2024. This reduction would primarily affect competition with West Texas Intermediate (WTI) flows, adding another layer of complexity to an already strained market.

The potential disruption in Libya comes at a critical time for global oil markets, which are already grappling with volatility due to broader geopolitical tensions in the Middle East. The situation between Israel and Hezbollah, while currently contained, could escalate, leading to further instability in the region.

Citi Research analysts suggest that any significant escalation could result in a wider blockade of oil export flows, particularly in Libya, which could push oil prices even higher.

Moreover, the political situation in Libya is precarious, with the possibility of further deterioration into armed conflict if international efforts to mediate the crisis fail.

Such a scenario would likely result in a prolonged disruption of Libyan oil exports, exacerbating the supply-demand imbalance in the global oil market and potentially leading to sustained higher prices.

This article first appeared in Investing.com