Libya/oil: The end game in Libya could herald an oil price slump. Like the rebels’ advance into Tripoli, Libyan supplies to the global market could come sooner than expected. Brent has slipped by $3 to almost $106 a barrel in a matter of hours.
A resolution in Libya, coupled with concerns over global growth, means tight markets could soon look oversupplied. A return of Libyan oil production to pre-unrest levels of 1.7 million barrels a day, or two per cent of the global supply, would take until 2015, according to a June estimate of the International Energy Agency. The forecast may now look too pessimistic, with the rebel-controlled Arabian Gulf Oil Co, Spain’s Repsol, and Italy’s ENI, all suggesting normal supply could resume much faster once the crisis is resolved.
Analysts reckon production could reach up to 1 mbpd within a year. Oil prices have already eased almost $20 a barrel in four months. A supply increase, just as the US and European economies look vulnerable to a new recession, will further weigh on prices. And Saudi Arabia’s recent effort to offset the disruption from Libya, taking production to a record high of almost 10 mbpd, will inadvertently act to compound any supply glut, as will the IEA’s release of emergency reserves.
Yet, any price slump is likely to be much less severe than in 2008, when oil prices crashed by more than $100 a barrel in six months. This time around, credit lines remain open to businesses. And, oil demand remains strong from non-OECD countries like China, which now account for almost 50 per cent of the total compared to 44 per cent in 2008, according to Barclays Capital. Politics will further support prices.
Investors remain alert for any signs the protest movement could yet spread to larger oil producers, namely Iran. And, even if prices continue falling, high-spending Gulf oil countries have a big incentive to cut production quicker than before. Saudi Arabia needs roughly $84 a barrel to break even, compared to around $50 a barrel three years ago. But, with Brent prices some way off the pain threshold for producers, there’s still room for a significant adjustment.
