Libya Oil Output Highest Since 2014, but Goldman Maintains that Market is Tightening

Some analysts believe a tremendous buying opportunity is unfolding.

More bad news for the concerted effort of the Organization of the Petroleum Exporting Countries (OPEC) to reduce the oil glut came on Monday with the disclosure that Libya's output has reached the highest level since 2014, due to progress in solving political divisions.

But even though this will presumably cause more market turmoil, analysts remain divided about where prices will go next: deep into the $40s, according to some sources, or sky high say others, who are convinced that a major tightening is imminent.

A person familiar with the situation told BloombergMarkets that Libya's production has reached about 780,000 barrels per day (bpd), a huge jump compared to the 700,000 bpd high that Jadalla Alaokali, a board member at state producer the National Oil Corp., announced for the end of April.

The escalation is said to be due to Libya's feuding administrations agreeing last week to unite state institutions and build a national army under civilian leadership, thus putting an end to clashes of armed groups that have closed fields of late.

Also, the NOC will reportedly sell about 600,000 barrels of Mellitah blend crude from El Feel in a tender to be announced after mid-May - the first sale since the field halted production in 2015.

Given the plethora of negative influences plaguing those who seek to restore market balance, it's not surprising that $7 million worth of options changing hands last week will pay off if West Texas Intermediate falls below $39 per barrel by mi-July, according to Bloomberg - which notes that although WTI hasn't traded below $39 since April of 2016, "it's been dropping like a stone in recent weeks."

The over 14,000 August $39 puts that changed hands is almost 20 times the number of contracts previously outstanding for the bearish option, and it reflects the "crescendo of negativity" influencing the market, said James Cordier, founder of Optionsellers.com.

But if Citigroup Inc. and Goldman Sachs Group Inc. are to be believed, oil is rapidly getting tighter, and the recent five month low is driven purely by technical trading.

Ed Morse, head of commodities research for Citigroup, told Bloomberg that "The market is really fundamentally tightening up; it's never possible to call a bottom, but I suspect this is a great buying opportunity" before a big jump in prices by the end of the year.

To which Goldman Sachs added in a note, "The broader oil demand picture so far this year remains supportive"; The bank bases its optimism on fuel stockpiles continuing to decline in April, a trend it believes will accelerate as OPEC extends its cutbacks to the end of this year and possibly through 2018.

Even last week's disastrous nosedive of WTI prices has an upside for some: Tim Evans, an analyst at Citi Futures Perspective, noted that "We are moving toward a positioning where these money managers are no longer over-invested; this opens up the potential for them to start buying again."

Still, the majority of opinion on where the market is headed still seems to be weighed on the negative, and Gordon Todd, founder of TradingAnalysis.com, recently expressed the sentiments of his colleagues when he worried that oil "has spent a lot of time consolidating around this $52 to $55 area now....we've been rejected [from a breakout above $55] for probably the fourth time now."