Libya’s power divisions could once more fracture its oil output – as markets question for how long

A political standoff in Libya risks once more paralyzing the north African country’s lucrative oil sector — but the frequency of its power tussles and crude disruptions have called long-term oil price support into question.

Politically fractured since the NATO-backed ousting of Moammar Gadhafi, Libya once more finds itself mired in conflict between the internationally recognized Tripoli government of Abdul Hamid Dbeibah and its eastern Benghazi-based rival administration endorsed by Libya’s highest legislative body, the House of Representatives. Hanging over them is the specter of eastern warlord Khalifa Haftar, whose allied forces safeguard and control most of the country’s oilfields.

Tensions recently spiked once more over the fate of oil revenues, as efforts by Dbeibeh to remove Central Bank Governor Sadiq al-Kabir prompted the Benghazi administration to announce the shutdown of oilfields.

Libya’s National Oil Corporation (NOC), which administers the country’s hydrocarbon resources, has yet to comment on the announced closures, but its subsidiary Waha Oil has acknowledged “protests and pressures could lead to the cessation of oil production,” according to a Google-translated statement.

Fellow subsidiary Sirte Oil cited the same reasons for having to “gradually reduce production” and urged “specialized authorities to intervene to preserve the continuity of oil production” in a Google-translated social media post.

Libyan sources who could only comment anonymously because of security concerns told CNBC that several fields have fully shut down or reduced crude production.

Prior to the latest escalation, Libya’s largest field, the 300,000 barrels-per-day El Sharara, was shut down in early August amid protests orchestrated by demonstrators from the Fezzan region. The National Oil Corporation subsequently declared force majeure — a legal provision covering a company when it fails to deliver oil supplies because of circumstances out of its control — on El Sharara’s crude exports on Aug. 7, according to a NOC note to clients.

Since then, production of Libya’s largest export crude grade Es Sider has declined, with the Dhahra field shut down, along with gradual or complete halts at the Amal, Nafoora, El Feel and Mesla fields, Libyan sources tell CNBC.

A member of the influential Organization of the Petroleum Exporting Countries (OPEC) group, Libya boasted a crude production of 1.18 million barrels per day in July, according to independent assessments cited in the August edition of the OPEC Monthly Oil Market report — and between 700,000 to 900,000 barrels per day of this volume could “likely go offline by the end of the week,” Rapidan analysts said at the start of the week, warning that supplies and exports from the majority of Libya’s hydrocarbon-rich “Oil Crescent” region “will be offline within days, with outages lasting several weeks.”

Echoing the sentiment, Andrew Bishop, global head of policy research at Signum Global Advisors, described the latest shutdowns as “the real thing,”  flagging that the disruption could last for “at least a month (and possibly far longer)” amid “zero trust” between the rival parties.

But Libya’s oil production has long been a victim of ransom for capital or political advantage — and the frequency of transient disruptions have eroded some market participants’ expectations that the latest disturbance will last long term. Oil prices, which have been slumping under the auspices of anemic demand from the world’s largest crude importer China, rallied on Monday on the Libyan reports — but surrendered much of these gains in the Tuesday session.

Prices were down once more on Wednesday, with the Brent crude futures contract with October expiry trading at $78.42 per barrel at 12:57 p.m. London time, down by $1.13 cents per barrel from the previous settlement. The front-month October Nymex WTI contract was at $74.31 per barrel, lower by $1.22 per barrel from the Tuesday close price.  

“Prices have not stayed elevated on the Libyan reports especially because, there’s a couple of things: the first one, I think, is because of the current disagreement on the Central Bank, the Libyan Central Bank, I think is likely to resolve soon,” Jorge Leon, senior vice president of oil market research at Rystad Energy, told CNBC Wednesday.

“We haven’t really seen … extended Libyan supply disruptions in the last two years and even more, [in the last] two and a half years, and I think this time is not going to be different. I think that both parties have incentive to resolve this as soon as possible,” he added.

Goldman Sachs analysts likewise saw the prospective Libyan disruption as short lived.  

“Market participants seem sanguine,” Barclays’ Amarpreet Singh assessed in a Tuesday note, flagging that “in a way, the situation in Libya is reminiscent of the elevated geopolitical tensions in the Middle East, as in fundamentals could move in the direction opposite to the risks implied by geopolitical developments for a sustained period.”