Oil Futures Rally on Tuesday

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied Tuesday on shut-in oil production in Libya amid an internal struggle for control of the country's oil sector and ahead of presidential elections scheduled for Friday (Dec. 24) that have now been canceled, according to various reports. The force majeure, declared Monday, pivots market concerns away from worries over lost demand caused by a surging omicron COVID-19 variant to tightening global oil supply availability, with Libya's descent into political conflict seen as potentially keeping at least some of the north African nation's oil exports bottled up for an extended period of time.

Libya's National Oil Company said it had no choice but to declare force majeure on its oil exports after the Petroleum Facilities Guard militia which protects the countries oil fields and pipelines shut-in oil fields in the eastern part of the country.

In a statement on twitter, Mustafa Sanalla, the head of the Libyan Oil Corporation, said "Executing our obligations towards the oil market has become impossible, and accordingly, we are obliged to declare a state of force majeure."

The action reportedly took place amid contention between Sanalla and Akakus Oil Operations, a joint venture including NOC, Repsol, OMV, Equinor and TotalEnergies.

Four oil fields have been shut-in according to multiple reports, including El Feel, Wafa, Hamada, and El Sharara, Libya's largest oilfield with a 300,000-barrel-per-day (bpd) production capacity. Akakus Oil operates El Sharara.

The production shut-ins prevent oil from reaching the Mellitah and Zawiyah ports situated near Tripoli, prompting force majeure on exports from these terminals. Mellitah has a 90,000 bpd oil export capacity, and Zawiyah has a maximum 250,000 bpd refining and export capacity. Currently, it doesn't appear that the force majeure would be extended to western export facilities where there are five ports for oil exports since the acrimony is between NOC and Akakus.

Citing secondary sources, the Organization of the Petroleum Exporting Countries said Libyan oil production averaged 1.14 million bpd in November, the most recent data available. Libya self-reported 1.211 million bpd in oil output for last month.

Reduced oil production in Libya is likely to limit actual barrels OPEC+ will be able to reintroduce to the market as it unwinds production cuts put in place in April 2020 in response to the loss in global oil demand amid the pandemic. OPEC+ in July agreed to add 400,000 bpd in oil output monthly until all the cuts are returned but has largely underproduced the goal as some members' output rates suffer from low investment and maintenance. Losing Libyan oil barrels would exacerbate the situation, limiting global oil supply.

The International Energy Agency on Dec. 14 said global oil supply would likely outpace demand by 1.7 million bpd in the first quarter 2022, and by 2 million bpd in the second quarter, with those expectations counting 400,000 bpd in monthly production increases from OPEC+. IEA's outlook included a reduction in its oil demand outlook of 100,000 bpd because of the spike in COVID cases, so a time extended Libyan force majeure, not to mention an expanded force majeure that reaches to western ports, suggests a tighter global oil supply-demand balance than expected just one week earlier.

Domestically, the American Petroleum Institute is set to release its estimates on the stock change for commercial crude oil, gasoline, and distillate fuel. A Wall Street Journal survey found expectations for a 2.6-million-barrel (bbl) drawdown in commercial crude oil inventory to have occurred during the week-ended Dec. 17, with crude draws in December typical as refiners reduce end-year inventory ahead of ad valorem taxes on that supply in Texas and Louisiana. Market estimates see a modest 100,000 bbl build in gasoline stocks for the week and 400,000 bbl distillate draw, although expectations varied widely for both products between builds and draws neutralizing the estimate. The U.S. refinery run rate is seen up 0.4% last week, with the Energy Information Administration last reporting the national run rate averaging 89.8% of capacity during the week-ended Dec. 10.

At settlement, NYMEX February West Texas Intermediate futures were up $2.51 at $71.12 bbl, and ICE February Brent gained $2.46 to $73.98 bbl. NYMEX January ULSD futures settled 8.48 cents higher at $2.2578 gallon, and the January RBOB contract ended with a 6.22 cents gain to settle at $2.1522 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne