OPEC’s Oil Dilemma: Libya Might Only Be The First Shoe To Drop

“Make my day,” Saudi Energy Minister Abdulaziz bin Salman, also known as AbS, said last week to anyone willing to bet against OPEC and high oil prices. 

What he didn’t count on was Libyan military strongman Khalifa Haftar.

Hours after AbS and his colleagues signed out of their Zoom conference on Sept. 17, General Haftar, who waged a long war with the U.N.-recognized government in Tripoli, announced a peace deal that could bring a lot more Libyan oil to the market.

Earlier that day, the Organization of the Petroleum Exporting Countries was on message at its 60th anniversary celebration and news conference chaired by AbS. 

At the event, all of OPEC’s 13 members pledged to produce only what they were allowed and even pump below quota if necessary to make up for past transgressions. The idea was to keep supply below demand and crude prices above $40 per barrel to fund oil economies, cash-starved by the coronavirus pandemic. Of course unspoken exceptions applied to Saudi Arabia, the cartel’s head, and Russia, which helps steer the broader OPEC+ group. OPEC+ ties OPEC's original members with an alliance of 10 non-member oil producing countries.

One General Could Upset It All/h2

Haftar, who wasn’t at that meeting, could upset OPEC’s applecart.

As of Thursday, Libya’s oil terminals at Hariga, Brega, and Zueitina were open for business and welcoming tankers to ship oil, although the biggest port and the terminal typically exporting crude from the largest oilfield in the country was still under force majeure.

The North African nation’s National Oil Corp said it expects production to rise to around 260,000 barrels per day, or bpd, by next week, up from some 100,000 bpd before the blockade of its oil ports and oilfields lifted by Haftar’s forces at the end of last week. 

Total Libyan production could reach 550,000 bpd by the end of the year and nearly a million bpd by mid-2021. All that for a country that did not export a single barrel from January due to the civil war forced by Haftar. At its peak in 2008, Libya produced nearly 1.8 million bpd.

The shifting market dynamics could force OPEC back to the drawing board, to figure out what to do with all that unexpected new supply. 

For background, OPEC’s pledge to cut 9.6 million bpd from May was what brought U.S. crude prices from a historic minus $40 per barrel in April to a five-month high of $43.77 by August. 

Emboldened by the steady price action of the past four months, OPEC decided to roll back its cuts by two million bpd from this month, taking a gamble that the market won’t crash, as economies continue to recover from the worst of the COVID-19 disruption. AbS’ warning to oil bears that they’ll be “ouching like hell" if they try to short the market was part of a calculated campaign to defend prices.

To Oil Traders, It’s The Barrels That Matter, Not Scare Tactics /h2

But with hundreds of thousands of additional barrels making their way to sea each month, oil traders are more likely to be swayed by the cargo volumes showing up on tanker trackers’ logs than the scare tactics employed by AbS. To OPEC’s credit, the Libyan dynamic had not weighed much on U.S. crude or global benchmark brent over the past week. Yet, it might just be a matter of time before they come under renewed pressure. 

“We do not need the extra oil,” Marco Dunand, Mercuria’s co-founder and Chief Executive told Bloomberg in an interview this week, referring to the higher Libyan output.

Dunand said global oil stocks increased by 500,000 to 1 million bpd in September but will be drawn down by about 1 million bpd in the fourth quarter.

He added:

“We see a fair amount of oil going into ships, into floating storage, now. We are filling up both tankers as floating storage and onshore tanks in September. There has been a slow-down in the global rebalancing process.”

Standard Chartered analyst Emily Ashford, meanwhile, told a Bloomberg-hosted panel discussion that a possible collapse in the OPEC+ deal is the biggest downside price risk to the oil market.

Another problem noted by analysts at Bloomberg: time spreads between front-month and nearby contracts signaling further weakness. The spreads between the two nearest December contracts for both U.S. and global benchmark crude futures on Thursday moved deeper into contango—or losses for those rolling such positions month after month.

Reports emerged earlier this month that commodity traders were chartering more tankers to store crude oil offshore, sparking concern we could see something like a repeat of this spring when hundreds of millions of barrels of unsellable oil had to be dumped on tankers because onshore storage was full. After the lockdowns ended, oil sales began improving but not for jet fuel, which remains the worst demand component of the lot. 

After Libya, Will Iran Be The Next Shoe To Drop On OPEC?/h2

If analysts are right, Libya might only be the first shoe to drop on OPEC. A bigger one, Iran, could be next, followed possibly by Venezuela down the road. 

For nearly two years now, the Trump administration has successfully halved Iran’s output with sanctions, with London-based Facts Global Energy estimating Tehrans’s production at 1.9 million bpd from pre-sanctions level of 3.8 million bpd. The Islamic Republic’s oil exports, which averaged 2 million bpd prior to sanctions, have sunk 90% to an average of 200,000 bpd.

In Venezuela’s case, it was producing nearly a million bpd 18 months ago, before White House sanctions hit. In August, Caracas’ state-owned oil firm PDVSA shipped an average of 325,000 bpd—the highest in four months, with most of it coming from stockpiled crude as production hovered around 100,000 bpd. 

Washington this week unilaterally restored sanctions on Tehran, adding to earlier restrictions, even as the process was questioned by other members of the U.N. Security Council. 

While his administration has maintained its tough talk of “maximum pressure” on Iran, Trump told reporters recently that he might be open to doing an oil deal with the Middle East state once the Nov. 3 U.S. presidential election was out of the way.

As of now, there is no sign that the mullahs in Tehran want to deal with Trump, however great their pain. And while the President assumes he will be staying in office for a second term to do such a deal, if he loses the presidency to Joe Biden, Iranian oil exports might still make a comeback to the market after November.

But OPEC isn’t out of options yet. The cartel and its partners in OPEC+ will discuss next steps later this year, with the original plan involving a further relaxation of the cuts, by 2 million bpd, from January 2021. With crude barely budging above $40 per barrel and producers desperate to fund their economies with higher revenues from oil, hard choices—between curtailing output to preserve prices and selling more barrels to get more cash—will have to be made.

Last week, AbS warned oil short sellers not to assume that OPEC would be complacent in fighting them, saying gone were the days when the cartel met once in a few months to react to market shifts. With the coronavirus pandemic, OPEC will take a proactive and preemptive stance in addressing market challenges, he said, hinting at a strategy to stay ahead, if not just a step behind, rivals with regular virtual meetings. 

Seeing what it is up against, OPEC may have to start doing this sooner rather than later.

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Written By: Investing.com