Fragile Libyan Oil Stability Shattered
Eastern-based rival government announces intention to shutter all production and block exports at a delicate moment for the global oil market and OPEC’s efforts to normalize supply.
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Libya’s oil production worth 1.2 MMbpd to global markets has been abruptly thrust into chaos following a declaration of force majeure by Libya’s eastern government (the Government of National Stability or GNS), which doesn’t have the technical authority but absolutely has the proven capacity to enforce it.
Production has already fallen by nearly half, to ~600 kbpd, including the weeks-ago throttling back of Libya’s largest oil field by GNS-aligned protestors; but, it will likely take another week or so for the outages to begin actually hitting the market in the form of lower exports.
The Libyan oil industry has frequently been used as a political tool since the 2011 civil war and, historically, these outages have lasted as little as a couple months and as long as several years.
This loss of Libyan production comes at a time-sensitive moment for the global oil market and for OPEC, in particular, which is set to decide on the fate of its planned Q4 production cut easing over the coming weeks.
Libya’s eastern-based rival government declared force majeure on the country’s oil shipments on August 26th: effective immediately, it is moving to shut down the country’s oil production and exports. Libyan political and security realities are immensely complex: a perpetual post-crisis environment following the 2011 civil war defined by fractured militant groups, powerful warlords, an only quasi-functional internationally-recognized government in Tripoli, and UN-backed settlements and power-sharing arrangements tenuously holding the entire volatile powder keg together. But beyond the basics, the focus of this post isn’t going to be Libyan politics. This move disrupts a comparatively stable stretch for Libya’s oil industry and threatens to take upwards of 1 MMbpd of crude oil production off the market. Crude prices spiked immediately, though have since fallen back from that initial reaction.
What does this disruption mean for oil markets? First and foremost, it will have an impact on global balances and, specifically, OPEC+’s planned cuts easing. As discussed recently in Current Context: Oil in August 2024, the oil market will be primarily driven, over the coming months, by OPEC+’s decision to continue with, postpone, or amend its current plan to begin easing its latest 2.2 MMbpd tranche of oil production cuts. Beyond the effect on overall global balances, the effect of this loss will be especially pronounced due to the fact that Libya exports primarily light-sweet crude. Light-sweet crudes have been experiencing recent strength and, given the heightened role of speculative flows in crude price formation, the fact that lost barrels will have the largest effect on the most visible prices is sure to have a momentum-positive effect.
Here’s how I’m thinking about this disruption as it continues to evolve.
How We Got Here, Very Briefly
