Crude Prices Fall as Libya Ramps Up Production

Oil prices dropped Monday on fears that some of Libya's long-blockaded crude would return to the market, adding to the global glut.

Brent crude oil, the global benchmark, fell 2.4% to $42.12 a barrel and West Texas Intermediate futures, the main U.S. benchmark, were down 2.7% at $40.03 a barrel.

Oil prices rallied last week on a combination of lower-than-expected U.S. inventory data and the Organization of the Petroleum Exporting Countries's reaffirmation that it would further restrict supply should Covid-19 continue to sting demand.

However, prices took a hit after Libya's National Oil Corporation restarted production in the east of the country, following a deal over the weekend between the internationally-recognized government and renegade Russian-backed commander Khalifa Haftar, who had blockaded production there for eight months.

Libyan officials told The Wall Street Journal the country's total production figure was set to rise by 220,000 barrels a day from Thursday.

The deal came amid a near-decade-long civil war in Libya and allowed the state oil company to end its force majeure -- the legal status that allows a party to default on its contracts for reasons beyond its control -- on exports.

"Libya is the main element behind prices today," said Norbert Rücker head of commodities research at Swiss bank Julius Baer. "Libya's been the wild card of the oil market for some time with a history of turning on and off its supply to the market and this comes at the wrong time for oil."

Libya produced more than a million barrels of oil a day in 2019, according to the International Energy Agency, but several groups have closed or sabotaged oil facilities in recent months. In August, Libya produced just 100,000 barrels a day, the IEA said.

Libya's NOC said it would only restart production and exports in facilities that were safe and unoccupied by Russian mercenaries.

With global coronavirus cases rising and a recovery in demand faltering, oil prices have suffered in recent weeks. The prospect of higher supply from Libya will put further pressure on other OPEC members in their efforts to rebalance the market, Mr. Rücker said.

Some analysts said that the fragile accord in Libya wouldn't derail that rebalancing. A speedy return to full capacity is threatened by "significant uncertainty on the timing, magnitude and sustainability of such a ramp-up, due both to the lack of resolution to the ongoing Libyan conflict and to the damages to existing infrastructure," said Damien Courvalin, head of energy research at Goldman Sachs.

Aside from supply concerns, worries about renewed transportation and distancing restrictions are bringing a fresh wave of demand worries to the oil market and weighing heavily on equities, said Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad Energy.

Write to David Hodari at David.Hodari@dowjones.com and Benoit Faucon at benoit.faucon@wsj.com

By David Hodari and Benoit Faucon

Oil prices dropped Monday on fears that some of Libya's long-blockaded crude would return to the market, adding to the global glut.

Brent crude oil, the global benchmark, fell 5% to $41.00 a barrel and West Texas Intermediate futures, the main U.S. benchmark, were down 5.7% at $38.96 a barrel.

Early pressure on crude prices intensified later in the day as other asset classes sold off and the U.S. dollar strengthened. Oil is denominated in dollars and a stronger dollar makes the commodity more expensive for holders of other currencies.

Oil prices rallied last week on a combination of lower-than-expected U.S. inventory data and the Organization of the Petroleum Exporting Countries's reaffirmation that it would further restrict supply should Covid-19 continue to sting demand.

However, prices took a hit after Libya's National Oil Corp. restarted production in the east of the country, following a deal over the weekend between the internationally recognized government and renegade Russian-backed commander Khalifa Haftar, who had blockaded production there for eight months.

Libyan officials told The Wall Street Journal the country's total production figure was set to rise by 220,000 barrels a day from Thursday.

The deal came amid a near decadelong civil war in Libya and allowed the state oil company to end its force majeure -- the legal status that allows a party to default on its contracts for reasons beyond its control -- on exports.

"Libya is the main element behind prices today," said Norbert Rücker head of commodities research at Swiss bank Julius Baer. "Libya's been the wild card of the oil market for some time with a history of turning on and off its supply to the market and this comes at the wrong time for oil."

Libya produced more than a million barrels of oil a day in 2019, according to the International Energy Agency, but several groups have closed or sabotaged oil facilities in recent months. In August, Libya produced just 100,000 barrels a day, the IEA said.

Libya's NOC said it would only restart production and exports in facilities that were safe and unoccupied by Russian mercenaries.

With global coronavirus cases rising and a recovery in demand faltering, oil prices have suffered in recent weeks. The prospect of higher supply from Libya will put further pressure on other OPEC members in their efforts to rebalance the market, Mr. Rücker said.

Some analysts said the fragile accord in Libya wouldn't derail that rebalancing. A speedy return to full capacity is threatened by "significant uncertainty on the timing, magnitude and sustainability of such a ramp-up, due both to the lack of resolution to the ongoing Libyan conflict and to the damages to existing infrastructure," said Damien Courvalin, head of energy research at Goldman Sachs.

Aside from supply concerns, worries about renewed transportation and distancing restrictions are bringing a fresh wave of demand worries to the oil market and weighing heavily on equities, said Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad Energy.

Write to David Hodari at David.Hodari@dowjones.com and Benoit Faucon at benoit.faucon@wsj.com


  (END) Dow Jones Newswires
  09-21-20 0831ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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