Market Boost Due to Libya Disruption is Merely a Blip, Say Experts

Wood Mackenzie has warned of increasing signs of a growing U.S. supply glut

A whopping 20 percent decline in crude output from Sharara, Libya's biggest oil field, caused a market weary of endless news about the global supply glut to boost West Texas Intermediate by 64 cents to $48.37 per barrel and Brent by 58 cents to $51.33 per barrel on Tuesday.

But analysts warn that this is merely a fleeting pause in a steadily downward price spiral.

Libya's output reportedly dropped to 560,000 barrels per day (bpd) after the pipeline from Sharara to the Zawiya refinery in North Africa ceased operation, due to the state-run National Oil Corp. declaring force majeure on loadings of Sharara crude from Zawiya and on Wafa field condensate from the Mellitah terminal.

It is unclear why NOC declared the legal status, which protects parties from liability in situations where they cannot fulfill contracts due to reasons beyond their control.

Richard Mallinson, an analyst at Energy Aspects Ltd., said, "The important question for the market will be whether this turns into a lengthy disruption or not; the political and security situation remains deeply unstable, and so I am not surprised to see Libyan output continue to fluctuate on these kinds of issues."

Tim Evans, energy futures specialist at Citi Futures, noted, "Past outages have ranged from a few days all the way up to two years, although the need for oil revenues will be a strong incentive to negotiate a pipeline restart sooner rather than later."

However, data released this week from Wood Mackenzie suggests that any decline in global output will be rendered meaningless by the nation that media seems to have singled out as the key gadfly in the push by the Organization of the Petroleum Exporting Countries (OPEC) and partners to reduce the glut - namely, the U.S.

In an analysis of 33 of largest upstream companies with hedging programs, the consultancy found that an annualized 648,000 bpd of new oil hedges have been added by oil producers since the fourth quarter of 2016, an increase of 33 percent from the third quarter of the year and more than in any of the previous four quarters.

Andy McConn, research analyst for Wood Mackenzie, pointed out that "Those producers – most of which are highly exposed to U.S. (shale) – will use hedging gains to help plug any budget deficits caused by sub-$50 spot prices."

In short, the numbers strongly indicate that U.S. drilling activity will continue to increase, although McConn went on to state that oil futures prices must recover before producers can lock in prices over $55 per barrel for next year, "which is what we think is needed to organically fund significant (shale) oil production growth."

Meanwhile, more bad news for those concerned with swelling inventories and rampant production came in the form of analysts polled by Reuters predicting that upcoming data will show U.S. crude oil stocks rising 1.4 million barrels in the latest week.

This caused Ole Hansen, head of commodity strategy at Saxo Bank, to remark, "An increase of more than 322,000 barrels will see Cushing hit a record."

Bill Baruch, chief market strategist at IITrader, recently warned that even if an extension of the OPEC output reduction agreement is ratified, the rise in U.S. shale production alone will wipe out most of its gains: "The U.S. has already taken up two thirds of the OPEC cuts with the remainder of 2017 left."